Ties between the two countries may be mending after a year marked by disagreements over the yuan’s value, U.S. arms sales to Taiwan and Google Inc.’s decision to pull out of China. In an hour-long call yesterday, Obama sought Hu’s support for Group of 20 pledges to sustain the global economic recovery and for cooperation to help stop Iran from developing nuclear weapons.
Obama “emphasized the importance of the United States and China along with other major economies implementing the G-20 commitments designed to produce balanced and sustainable growth,” the White House said late yesterday in a statement.
Hu’s presence at this month’s nuclear summit improves the chances China won’t be labelled a manipulator when the U.S. Treasury releases its biannual report on exchange rates, said China International Capital Corp., a Beijing-based investment bank that’s part-owned by Morgan Stanley.
U.S. Treasury Secretary Timothy F. Geithner is under congressional pressure to make such a ruling after China kept the value of the yuan unchanged against the dollar for almost two years. Critics say that gives Chinese exporters an unfair advantage.
The Treasury is scheduled to release its report April 15. The New York Times reported today that it may now delay publication. Treasury spokeswoman Natalie Wyeth declined to comment.
Rhetoric Shift
“In the past few weeks, rhetoric has turned sour from both sides, but this development is one of the initial signs” relations are thawing, Hao Hong, Beijing-based global equity strategist at CICC, said in an e-mailed response to queries.
Yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Twelve-month non-deliverable forwards advanced 0.2 percent to 6.6491 per dollar as of 5:30 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.7 percent from the spot rate of 6.8256, according to Bloomberg data.
New York University professor Nouriel Roubini said last week the U.S. and China are on a “collision course” over the Chinese currency and investors are underestimating the disruptions for global financial markets. Avoiding the manipulator tag may give China further scope to let the yuan gain to ease inflation pressures in its economy.
China’s Growth
“The latest development should make it more likely for Beijing to start moving away from the renminbi’s current de facto peg within the next few months, if not weeks,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report yesterday. “Since China is growing much faster than most of its trading partners, keeping the de facto peg for too long will only invite more protectionism.”
The Treasury hasn’t labelled any country a currency manipulator since 1994. Five U.S. senators, including Charles Schumer, a New York Democrat, and South Carolina Republican Lindsey Graham, last month introduced legislation to make it easier for the U.S. to declare foreign-exchange misalignments and take corrective action.
Any delay in the report would not be rare given Democratic and Republican Treasury departments historically have released it at their convenience. In January 1999, President Bill Clinton’s Treasury even published a compendium of those that had been due in 1997 and 1998 and President George W. Bush’s administration also repeatedly missed the deadline.
Asset Bubbles
China’s central bank said today that asset bubbles are emerging in parts of the world and in certain industries that may burst unless supported by real economic recovery. Chinese growth in the fourth quarter reached 10.7 percent.
Rapid asset-price increases in major markets since 2009 have been pushed by “ultra-loose” monetary policies by governments around the world and “don’t mean real economies have recovered or will recover strongly,” the People’s Bank of China said in a report posted on its Web site today.
China pegged the yuan at about 8.3 per dollar from 1995 until July 2005, when the government shifted policy and allowed some fluctuation by managing its exchange rate against an undisclosed basket of currencies. After a 21 percent gain in the currency that hurt its exporters, China in July 2008 began restraining the yuan’s value.
If China doesn’t change tack it may face broader pressure to do so after French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown this week joined Obama in saying the G-20 should take currencies into account in efforts to deliver balanced global growth. G-20 finance ministers and central bankers are also scheduled to meet in Washington this month before a June summit of leaders in Toronto.
