China-U.S. spar over currencies ahead of Obama visit

The discord surfaced at a summit of the Asia Pacific Economic Cooperation (APEC) forum in Singapore when a reference to "market-oriented exchange rates" was cut from a communique issued at the end of two days of talks. An APEC delegation official said Washington and Beijing could not agree on the wording.

That underscored strains likely to feature when Obama flies to Shanghai later on Sunday following moves by Washington to slap duties on various Chinese-made products and a growing drumbeat of pressure on Beijing to let its yuan currency strengthen.

It also suggested investors should be cautious about betting on a yuan appreciation after a central bank statement last week appeared to give the green light for strengthening.

"China has pledged to keep monetary policy moderately loose, and their concern is still the economic recovery," said currency strategist Enrico Tanu Widjaja at OCBC Bank in Singapore. "They will probably let the yuan strengthen when they start tightening policy."

Chinese officials have grown testy about the pressure over the yuan. Chinese banking regulator Liu Mingkang told a forum in Beijing on Sunday that ultra-low interest rates in the United States were fuelling speculation in overseas asset markets and threatened the global economic recovery.

Obama pledged on Saturday to deepen dialogue with China rather than seek to contain the rising power, which is set to overtake Japan next year as the world's second-largest economy.

But issues ranging from the yuan and trade tensions to human rights could complicate what many regard as the most important relationship of the 21st century.

"With regards to trade, this is a difficult time for the U.S.-China relationship," said Derek Scissors, trade economist at the conservative Heritage Foundation in Washington.

"The signs are actually getting worse instead of better."

SPECULATION ON YUAN MOVE

Chinese President Hu Jintao ignored the yuan issue in several speeches at APEC and focused instead on what he called "unreasonable" trade restrictions on developing countries.

An earlier draft pledged APEC's 21 members to maintain "market-oriented exchange rates that reflect underlying economic fundamentals." That statement had been agreed at a meeting of APEC finance ministers on Thursday, including China, although it made no reference to the yuan.

Washington says an undervalued yuan is contributing to imbalances between the United States and the world's third-biggest economy. China is pushing for U.S. recognition as a market economy and concessions on trade cases that would make it harder for Washington to take action against Chinese products.

The yuan has effectively been pegged against the dollar since mid-2008 to cushion its economy from the downturn.

China is coming under growing international pressure to let it rise because its manufacturers have gained market share at the expense of rivals in countries whose currencies have risen against the falling dollar.

China's central bank said last week it would consider major currencies in guiding the yuan, suggesting a departure from an unofficial peg.

However, Chinese Vice Commerce Minister Chen Jian on Sunday played down talk of a shift in policy as well as mounting expectations of a rise in the yuan's exchange rate.

Beijing may have forced APEC to tone down its language on currencies to avoid encouraging bets on yuan appreciation that would suck speculative capital into China and fuel asset bubbles and inflation.

By Friday dollar/yuan volatilities were implying the strongest expectations the Chinese currency would appreciate since June, and the market for offshore non-deliverable forwards pointed to a 3.6 percent rise in 12 months.