Rise of the RMB

Here we go again…

The renminbi is back in the spotlight, with the Chinese media in a feisty mood

Time to complain again…

State news agency Xinhua says the timing of the latest complaint is not hard to fathom: “With US mid-term elections approaching, the renminbi exchange rate issue again becomes the victim of American politics.”

The Chinese responded with diversionary tactics of their own, announcing a delegation of 50 business leaders was on its way to America to buy goods and services. “Purchasers set to ease trade frictions,” was the on-message but off-the-mark headline in the China Daily.

The powderkeg moment saw Tim Geithner appear before Congress. “We are concerned, as are many of China’s trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited,” the US Treasury Secretary warned last Thursday.

Patience was running thin at the New York Times: “That China has undervalued its currency, the renminbi, for much of the past decade to boost its surging export-driven economy is not seriously doubted. Why does this situation persist?”

Are the US tactics effective?

The headline in the Shanghai Daily says it all, really: “China pans US Treasury criticism of yuan policy”.

Foreign Ministry spokeswoman Jiang Yu agreed. “The appreciation of the renminbi can’t solve the trade deficit with China. Pressure cannot solve the issue. Rather, it may lead to the contrary.”

But China hasn’t been entirely deaf to US protestation. The currency has been strengthening. After eight consecutive days of gains it hit a new high versus the dollar of 6.69 on Tuesday. Xinhua pointed out that was a 1.87% gain since June 19 when the central bank announced “greater exchange rate flexibility”. Don’t expect much more though. In a speech to American business leaders yesterday, Premier Wen Jiabao said China ruled out a “sharp rise in the yuan”.

The administration seems to think that tough talk will work. President Obama added to the noise on Monday, complaining that China’s leaders haven’t done “everything they said would be done” to allow the renminbi to rise in value. Bloomberg commented that the yuan hit its highest level since 1993 shortly after Obama’s criticism.

But even as America talked tough, Geithner sought to buy time for diplomatic dialogue with China, saying the US would use the G20 summit in Seoul in November to try mobilise support for Chinese currency reform. As the Wall Street Journal put it, Geithner is “stuck in the middle on China”. He needs to sound angry enough to shore up the Democratic vote in the mid-terms. But not so enraged as to alienate Beijing altogether.

Fair criticism?

No, said Yao Yang from the China Centre for Economic Research, who was quite cross in the”China Daily. This was another effort to “to make China the scapegoat for America’s poor economic performance”.

Yang continued that a recent study by American and Chinese scholars had established that a 20% rise for the yuan against the US dollar would increase US employment only marginally (0.16%). In contrast, China’s GDP would drop 3.18%. “So it is perfectly reasonable for Chinese policymakers to firmly reject the American demand,” Yang concluded.

Fred Bergsten at the Peterson Institute told Bloomberg that China’s purchase of dollars has depressed the value of the renminbi by as much as 25%, adding $500 billion to its current-account surplus and cutting US growth and employment.

But not all Western commentators are so sure. In the Financial Times, HSBC’s chief economist Stephen King thought Beijing was “right to ignore the currency pleas”. The real solution was to concentrate less on the exchange rate and more on promoting Chinese consumption through “much-needed social security and consumer credit reforms”.


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