Obama set to press China on currency revaluation

Author: By Stephen Foley in New York

While the long-running dispute between the US and China over the value of the Chinese currency is expected to be high on the agenda when the American leader reaches Beijing next week, China is already facing pressure from its neighbours to abandon a link with the dollar that they say is crimping their own economic recoveries.

The latest draft of a post-meeting communique from the Apec summit of Asia-Pacific nations in Singapore, which Mr Obama is scheduled to join at the weekend, calls for “market-oriented” exchange rates and interest rates ? in effect an argument for the yuan to appreciate against the dollar.

China has been accused of holding its currency artificially low to stimulate its own export-led economy, at the expense of manufacturing profits and jobs in other countries. The Chinese central bank, which holds the world’s largest foreign exchange reserves of more than $2 trillion, said this week that it would consider major currencies in guiding the yuan, suggesting a departure from an unofficial dollar peg that has been in place for more than a year.

Analysts said the move was Beijing’s clearest signal yet that it was close to letting the yuan appreciate after an 18-month hiatus. “The message we draw from the shift in the carefully chosen words is that trend decline in the dollar will no longer be resisted to the same degree,” said researchers at the Australian bank Westpac. “We expect greater movement on dollar/yuan soon, quite possibly ahead of Obama’s meetings with top Chinese officials next week and with a European delegation also arriving in China before year-end.”

But China’s assistant finance minister, Zhu Guangyao, told reporters at Apec that one of China’s contributions to the global economic recovery has been maintaining “currency stability”.

There would be a “big cost” for any early withdrawal of its measures to boost the economy, including fiscal, monetary and exchange-rate commitments, he said. The low value of the yuan has been exacerbated by the declining dollar, to which it is linked and which is down 15 per cent from a peak earlier this year.

Emerging market central banks have spent an estimated $150bn (£91bn) over the past two months intervening to keep their own currencies down by buying dollars, fearful that currency strength is damaging the value of their exports and leading to a loss of competitiveness against both the US and China.

The US, meanwhile, is facing calls to intervene to push up the value of its currency. Tim Geithner, the US Treasury secretary, again yesterday spoke about the special responsibility that the US has to protect the value of the dollar, which is used as a reserve currency around the world, but his commitment was only to pursue fiscal policies in the US that would eventually pay down some of the country’s record debt.

Mr Geithner said the Obama administration needs to borrow “substantially less than we initially anticipated” to bail out the financial system. “That’s going to allow us to devote more to debt reduction, and that’s a fundamentally good thing,” he added.

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