Currency issue stays hot topic as talks loom
Senior mainland and US officials will meet in Beijing this morning to start their fifth semi-annual strategic economic dialogue, a meeting many observers say is unlikely to yield any substantial results but could help lay the groundwork for future ties.
One of the thorniest issues - foreign exchange rates - could have been largely avoided if the central bank had not allowed the yuan to depreciate against the dollar on Monday, a move that prompted US officials to raise concerns about where the yuan would go in the near future.
US Treasury Secretary Henry Paulson highlighted the currency issue in a speech on Tuesday, breaking with his approach of limiting his comments on the dialogue to the need for China to open its financial market and spur domestic consumption.
'China has appreciated its currency over 20 per cent against the dollar since 2005 ... This is important and significant, but it is important that the process continues,' Mr Paulson told the World Affairs Council in Washington.
The yuan dropped by its daily limit of 0.5 per cent on Monday and Tuesday against the US dollar. It bounced back a little yesterday with intervention from the central bank.
A JPMorgan research note said the rare depreciation was a pre-dialogue signal to the US, warning the incoming administration of president-elect Barack Obama about the importance of maintaining dialogue.
But a speech by Vice-premier Wang Qishan suggested the intervention may not have been a deliberate warning.
He told a gathering of exporters that maintaining strong exports was the most important task in the year ahead, a task that would be made easier by a lower yuan.
Shi Yinhong , director of Renmin University's American Studies Institute, said this kind of abrupt change in agenda illustrated the importance of dialogue.
'We are facing unprecedented challenges brought on by this worldwide financial crisis, so it's rational for both countries to adjust their policies depending on their own evaluations of their economies. The key is not that they have to agree with each other, but understand why the other side chooses to do it,' Dr Shi said.
The dialogue started in 2006, partly at Mr Paulson's suggestion, and has been held twice a year, alternating between the US and China. This is the last round of such talks for Mr Paulson and the administration of US President George W. Bush.
The discussion was limited largely to the foreign exchange rate and trade issues at the beginning, but has gradually encompassed other issues such as energy, food safety and the environment.
Mr Paulson urged China to open up its financial markets to US investors, an issue that appears to be an increasingly hard sell this time because of the number of Wall Street investment banks that have fallen apart. Even Mr Paulson has admitted that the US investment banks did not set a good example of what an open market could do to for an economy.
Fudan University economics professor Zhou Dunren said Mr Paulson would keep raising the issue because China's growing financial market was too lucrative to ignore.
'They will certainly push the issue, but I doubt many Chinese officials would take a look at Wall Street now and say that's where China wants to go,' Professor Zhou said.
He said China was still trying to understand what happened in the US, so this dialogue would just allow both sides the chance to better understand the other side.
Tao Wenzhao, American affairs researcher at the China Academy of Social Sciences, agreed no substantial progress would be achieved in this discussion because the world had no idea of the best way out of the crisis.
'Both countries will tell the other side what they want to do to save their own economies, and that's probably about it. Both countries look like having more to worry about inside their borders rather than outside,' Professor Tao said.
China and the US have dozens of direct talks from ministerial to state level, but Professor Tao said the strategic economic dialogue could easily top them all as both sides bring a dozen or so ministers to the meeting every six months.
'I think the president-elect will certainly continue or even upgrade the dialogue, because his government cannot afford to lose China's co-operation at a time of turbulence,' Professor Tao said.