Chinese President Hu Jintao, who will arrive in the U.S. on Tuesday for a state visit, rejected Washington’s demand for an appreciation of the Chinese currency, and debunked what he called was a “zero-sum Cold War mentality” while calling for broader cooperation with the U.S. on a range of issues.
The focus during the three-day state visit, and beyond that, for that matter, will be on if Washington is prepared to act more sternly to make the Chinese let their currency appreciate.
Responding to U.S. Treasury Secretary Timothy Geithner's comment last week that rising inflation in China will warrant changes in exchange rates, Hu said inflation was not the main pointer in assessing yuan's value. Hu said his country has adopted a package plan to deal with the rise of yuan. Chinese central bank raised the bank reserve ratio last Friday by half a percentage point to curb the rise in inflation.
Hu's comments, which came before the start of his first state visit to the U.S. since 2006, is seen as a pump-priming effort by the Chinese to deflect the strength of American criticism of the undervalued yuan and its impact on the widening U.S. trade deficit with China.
THE POWER GAME
The U.S. treasury Department has repeatedly postponed making an official call on whether China is a currency offender, apparently apprehensive about worsening bilateral ties which are routinely rocked by political crises.
However, the question that has often come up is whether Washington's hand is weak on this count. There are many who argue that despite the seeming erosion of economic heft from the U.S. to China, there are lots of factors that give America an edge.
Yet China’s increasing trade dependence on the United States gives Washington enormous leverage over Beijing, especially because some large portion of the Chinese surplus with our country is attributable to violations of World Trade Organization obligations, author and columnist Gordon Chang wrote in Forbes.com.
China has an increasingly turbulent economy, heavily dependent on exports. And its exporters, despite all the talk about their “diversification,” are increasingly dependent on the American market.
He says that contrary to the popular thinking in the U.S. that China is more powerful than the U.S. economically, the U.S. can indeed come out on top. Isn’t it time we recognize the leverage our market gives us and use it to get the Chinese to stop their predatory trade practices and grossly irresponsible conduct, he asks.
TRADE DEFICIT AND YUAN
According to Xinhua, China's trade surplus for the whole of 2010 stood at a whopping $183.1 billion primarily on account of higher imports, though the amount had narrowed 6.4 percent from the previous year.
The mismatch in trade with the U.S. is even greater. According to U.S. Department of Commerce, between January and November 2010, the U.S. ran a trade deficit of $252.4 billion with China. What is even more alarming for the U.S. policy makers is that the rate of growth of deficit is going up year after year. In the corresponding period of 2009 the deficit was $208.7 billion.
The widening trade imbalances will prod U.S. lawmakers to put pressure on the Chinese president when he meets Congressional leaders. The lawmakers have long been saying that Beijing is keeping the yuan undervalued to boost exports.
A study by Peterson Institute for International Economics (PIIE) published in August suggested that if China allowed its currency to rise by 1 percent against its trade partners, its trade surplus would shrink by 0.30 to 0.45 percent of GDP.
A marginal fall in the U.S. external trade deficit in the second half of last year will not count for much, according to Paul Ashworth, an analyst at London-based research firm Capital Economics. Between June and November last year, the monthly trade deficit narrowed by almost $12bn, or more than 20%. Nevertheless, even at that lower level, the deficit is still equivalent to 3% of GDP and there is a good chance that it will widen again in the first half of 2011, as stronger domestic demand growth sucks in more imports, he said.