Big strides in Beijing

PUBLISHED : Tuesday, 26 December, 2006, 12:00am
UPDATED : Tuesday, 26 December, 2006, 12:00am

US Treasury Secretary Henry Paulson may be changing as much in Washington as in Beijing. He managed to get the agenda of his recent trip to China labelled a 'strategic dialogue'. That smoothed over offence given by an earlier Bush administration decision, when former president Jiang Zemin's strategic partnership with the US was downgraded to a strategic competition.

With that label, Mr Paulson upgraded his dialogue in Beijing's eyes. He did it despite knee-jerk resistance by Bush administration members and allegedly against the wishes of the Pentagon. It was a big step in the right direction.

During the visit, US Federal Reserve chairman Ben Bernanke addressed a crowd of over 1,000 people at the Chinese Academy of Social Sciences. Focusing on reforming the yuan exchange rate, he argued strongly that letting the yuan appreciate is crucial for China's economic stability: it would help Beijing retain an effective, sustainable monetary policy and promote consumption.

Dr Bernanke warned that today's low-priced yuan encouraged speculation on an inevitable appreciation and promoted the inflow of 'hot money' capital. He hoped his speech would send a message to Beijing about the need to reduce America's huge trade deficit.

But the message did not go over very well. The devaluation of the US dollar is dragging down the yuan, because they are pegged. Beijing adjusted the peg in July last year in response to US political pressure. But that gave no relief to manufacturers in the US, and congressmen still point to the exchange rate as a major problem in Sino-US relations.

At the recent meetings, Beijing reiterated that the yuan's exchange rate and pace of foreign-exchange reform were questions of sovereignty. That is strong language. Everyone listening remembered what former leader Deng Xiaoping said to British prime minister Margaret Thatcher, now Lady Thatcher, in 1982: 'Issues of sovereignty cannot be discussed.' Get the message?

Mr Paulson got the point, and responded cleverly, using carefully chosen language. He spoke of helping China 'realise sustainable domestic demand' as the 'main force of its economic road map'. That would lead to a China-US trade 'soft landing' through 'capital market opening', he said. Despite Mr Paulson's freshly adopted, China-focused gobbledegook, his message was pretty clear, too.

He was accompanied by a delegation of 50 people who sat down with Vice-Premier Wu Yi for two days of closed discussions. China's iron lady called for the US to understand China. Mr Paulson agreed, but said the yuan issue required action from China rather than US understanding.

Ms Wu recognised that the dialogue had been useful, saying that 'both sides have found many common points, but there are many issues upon which no agreement can be reached'.

Mr Paulson acknowledged Ms Wu's position. But he deftly warned that China's attitude towards its speed of reform could have negative, even regressive, results.

The US Treasury boss also praised Ma Kai , chief of the National Development and Reform Commission, for a commitment to open eight to 10 industries to help solve trade imbalances. Deals worth US$4.3 billion, involving mergers and acquisitions of Chinese companies, were signed in sectors including retail and air travel. That was Mr Paulson's Christmas present for Washington.

He still wants more opening of China's financial markets, and there are indicators that he may get his way. During the visit, delegates representing Nasdaq and New York Stock Exchange visited Binghai district in the nearby port city of Tianjin .

Binghai has been declared Tianjin's experimental financial district, even though it has almost no financial institutions.

Tianjin has strong political connections: could it lead China's financial reforms as Shenzhen did in industry and Shanghai in trade? If Mr Paulson is patient with China's new experiment, he might just have his way.

Laurence Brahm is a political economist, author, filmmaker and founder of Shambhala Foundation