Foreign Exchange Market

G8 summit offers Hu a window to adjust yuan policy

PUBLISHED : Wednesday, 06 July, 2005, 12:00am
UPDATED : Wednesday, 06 July, 2005, 12:00am

When President Hu Jintao arrives today at the Scottish golfing hotel of Gleneagles to attend the Group of Eight summit, he will be grateful not to be the centre of attention.

British Prime Minister Tony Blair, who is chairing the meeting of the rich countries' club, has steered the agenda firmly towards his own pet projects of alleviating African poverty and slowing climate change.

Although individual leaders are likely to bring up China's rapid export growth and the perceived undervaluation of its currency in private meetings with Mr Hu, there will be no joint communique criticising the country for trading unfairly, or calling for a revaluation of the yuan.

That will suit Mr Hu. Over the past few weeks, the volume of international demand for China to raise the yuan's value and rein in its textile exports has diminished somewhat.

If Mr Hu can navigate the links at Gleneagles without attracting fresh censure, a narrow window of opportunity may open for Beijing to inch towards a more flexible exchange-rate policy without losing face by appearing to bow to foreign pressure.

Trade friction with Europe has fallen markedly since last month when China struck a voluntary deal to limit textile exports. And with the euro down more than 10 per cent against the US dollar - and, hence, the yuan - since March, and the yen 7 per cent lower, China's currency is no longer such an urgent issue for European or Japanese leaders.

Tensions with the United States have also abated, at least for now. Last week, senators Charles Schumer and Lindsey Graham postponed until late September a vote on their bill demanding a 27.5 per cent tariff on Chinese imports unless Beijing revalues its currency within six months.

Apparently, they agreed to delay the vote that had been scheduled for later this month only after being convinced by Treasury Secretary John Snow and Federal Reserve chairman Alan Greenspan that China is already well on the way to revising its exchange-rate policy.

The postponement will undoubtedly ease tensions at Gleneagles. A European-style textile deal at talks next week between Commerce Minister Bo Xilai and US Secretary of Commerce Carlos Gutierrez would reduce the stresses still further, potentially opening a window for China to adjust its currency policy.

It will not be much of a window - just two months or so - but a growing number of China watchers believe Beijing may take advantage of the quiet dog days of August to widen the yuan's permitted trading band. It could be the best opportunity China has for years.

With the dollar relatively strong on international markets, signs are emerging that China's headlong pace of growth is slowing, and with many traders away on holiday, a rapid appreciation of the yuan after a band-widening will be a lot less likely than it would have been just a few months ago.

On the other hand, if China does not move, Mr Hu could get a rocky reception when he visits Washington in September. China would face fresh criticism at the IMF meeting the same month, and the Senate would almost certainly revive the Schumer-Graham bill.

Worse, the US Treasury could accuse China of currency manipulation at its November policy review, opening the way for the US to impose sanctions and raising the possibility of a trade war.