Barack Obama

Analysts say Beijing won't bend on the yuan to curry favour with Washington

PUBLISHED : Saturday, 25 September, 2010, 12:00am
UPDATED : Saturday, 25 September, 2010, 12:00am

Beijing will not buckle on the yuan's exchange rate to please Washington, analysts say, despite US President Barack Obama increasing the pressure in a meeting with Premier Wen Jiabao in New York on Thursday.

China must do more to revalue the yuan, Obama told Wen in what was described as a 'candid' two-hour meeting. Wen had adopted a tough stance on the yuan issue in speeches on the sidelines of the United Nations General Assembly before the meeting with Obama.

The Wen-Obama talks, the highest-level meeting between the two sides in months, came amid increasing frustration in Washington over China's trade policies and the long-running debate over the yuan's exchange rate. American critics say Beijing's undervalued currency gives Chinese companies an unfair trade advantage.

It also came at a time of heightened political sensitivity ahead of US mid-term elections, with Obama's Democrats losing ground due to the economic downturn and increasing unemployment.

A US congressional committee was expected to vote yesterday on legislation that would allow tougher tariffs to be placed on imports from China.

Thursday's meeting also came amid signs that both administrations are seeking to repair ties ahead of a state visit to the US by President Hu Jintao in January.

Jeff Bader, senior director for Asia on the US National Security Council, said the meeting was dominated by the economy, adding that Obama told Wen the foreign exchange row was the most important issue they would discuss.

Obama raised with Wen the 'need for China to do more than it has done to date' on the yuan, Bader said.

Tim Condon, chief economist with ING's Asian research, said political tensions had risen again over the yuan's exchange rate. Tom Orlik, China economist with Stone & McCarthy Research Associates, said that with mid-term elections approaching in the US, there was pressure on the Obama administration to demonstrate that it was making progress on the exchange rate issue.

'But it is not clear that Washington DC has any real tools to exert pressure on a recalcitrant Beijing,' Orlik said.

In speeches ahead of the Obama meeting, Wen warned against letting the issue be politicised, saying that there was 'no basis for a drastic appreciation of the yuan'.

During Thursday's meeting, Obama mentioned the two World Trade Organisation complaints his administration had lodged against China in recent days - in what may be seen as a veiled threat of more US action if the yuan does not rise.

Condon said the easiest way to soothe the US was for Beijing to restore the yuan appreciation trend that was halted in mid-2008 when China wanted to impart some stability to a world that was rapidly becoming unstable.

'Had the People's Bank of China continued to appreciate the yuan at the average pace of July 2005 to July 2008 it would be on course to move below 6 by the end of the year,' Condon said, adding that the accelerated pace of yuan appreciation this month was the start of a catch-up process.

Jianguang Shen, China economist with Hong Kong-based Mizuho Securities, said China would not be able to appreciate the yuan by 20 per cent against the US dollar, as some in the US have demanded, although a 'domestic consensus is being formed to quicken the pace of yuan appreciation, if a more market-oriented mechanism is allowed to work'.

Shen said it was hard to tell how much of the yuan's recent appreciation might be linked to US pressure, but he believed it was more a case of the rise being underpinned by fundamental economic forces.