Tags: hans | parisis | china | us | yuan | dollar

Rhetoric Rises With Yuan in China's Tug of War With US

Tuesday, 21 Sep 2010 01:34 PM

By Hans Parisis

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President Barack Obama said Monday that the Chinese currency “is valued lower than market conditions would say it should be.”

He added: “What we’ve said to them is, ‘You need to let your currency rise in accordance to the fact that your economy’s rising, you’re getting wealthier, you’re exporting a lot, there should be an adjustment there based on market conditions.’”

He also noted: “They (the Chinese) have said ‘yes’ in theory, but in fact they have not done everything that needs to be done.”

Also, following a meeting of U.S. Secretary of State Hillary Clinton and Foreign Minister of the People's Republic of China Yang Jiechi, U.S. State Department spokesman P.J. Crowley told reporters that currency issues formed a “significant part of the discussion.”

He also added: “Obviously it is an important aspect of our bilateral relationship. We both understand that this is something that both substantively and politically is a vitally important element of the relationship.”

Meanwhile, U.S. Senate Banking Committee Chairman Chris Dodd said that Congress won’t pass a currency bill this year. Nevertheless, he interestingly also noted that it might be possible for the White House and lawmakers to agree on the basic outlines of legislation before the G-20 summit in Seoul in November. He also added: “That might help, that would not be a bad arrow to have in your quiver going into Seoul.”

Evidence continues accumulating that before year’s end, we will see a full-scale resumption of the U.S.-China political battles over currency policy that dominated so much of the middle years of the last decade.

With a number of meetings already set up between national leaders on the sidelines of next week’s U.N. General Assembly meeting in New York to discuss foreign-exchange matters, the run-up to the G-20 meeting in Seoul in November and, of course, the U.S. midterm elections, could become a memorable one.

During the past few weeks, one of the key strands of this saga remains the tug of war between the U.S. and China over currency policy.

However, although there remains something very familiar about the rising rhetoric on both sides, one of the more unremarked upon aspects of the story is that since the visit by Larry Summers, the director of the White House National Economic Council, to Beijing on Sept. 4, the Chinese yuan has been steadily moving up against the dollar.

Indeed, the dollar (compared to the yuan) has dropped a solid 1.48 percent during the last 12 trading days, which is one of the most aggressive Chinese currency moves we have ever seen in this pair in the past decade.

The question is, “What are the possible explanations for this sudden upward move of the Chinese currency compared to the dollar?”

At its simplest, this move could be seen as a conscious effort to placate U.S. politicians, but also others like the Europeans, or at least to muddy the waters sufficiently that the Chinese won’t be named as a “currency manipulator” in the upcoming U.S. Treasury report.

However, the fact that the move emerged precisely in the aftermath of Summers’ visit to Beijing and that Treasury Secretary Geithner went out of his way last week to say that he saw little value in naming China as a currency manipulator suggests, at least to me, that one of the better explanations might be that some kind of an “esoteric” accord has been struck between the United States and China.

The big question that remains as to whether this is anything other than a “temporary” accord remains to be seen.

However, given the inherent problems of continuing to amass foreign-exchange reserves at the current pace, taking into account that the “Position for Forex Purchases” data published by the People's Bank of China (PBOC) showed that the PBOC and Chinese institutions spent 243 billion yuan (US$36 billion) in absorbing foreign-exchange inflows in August, I think we can suspect that it might be longer lasting.

Besides that, the National Bureau of Economic Research (NBER), the official arbiter of the U.S. business cycles, has declared that the recession ended in June 2009.

This satisfies a necessary condition for those seeking a double dip as one dip has to end before the next begins. Of course, the other condition for a double-dip outcome, which is evidence of a second dip, hasn’t materialized as yet …

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