Paulson To Prod China on Currency

By David Cho and Ariana Eunjung Cha
Washington Post Staff Writers
Wednesday, December 3, 2008

Treasury Secretary Henry M. Paulson Jr. will urge China to maintain a strong currency during high-level talks this week as worries grow in the United States that Beijing may be exacerbating the global slowdown by deflating the value of the yuan to spur its own economy, Treasury officials said yesterday.

China's exports have slowed as consumers in the West rein in spending and currencies of other Asian nations plummet because of financial turmoil at home, making those countries' goods cheaper on world markets. In recent days, the yuan neared five-month lows, prompting some U.S. economists to speculate that China is trying to keep its currency in step with its Asian competitors.

These economists say they worry that a devalued yuan would discourage ordinary Chinese from spending, reducing economic activity and thus contributing to the global slowdown.

In a speech yesterday ahead of his trip to Beijing, Paulson called on China to show "bold leadership" in its efforts to open its economy. "Continued reform of China's exchange rate policies is an integral part of this broader reform," he said. He cited the yuan's 20 percent appreciation since 2005 but added that more needed to be done.

"What is thought to be happening is that China is artificially weakening the yuan going into the meeting with Paulson," said Kathy Lien, director of currency research at GFT, a global currency brokerage in New York. "China wants a weak yuan, growth is beginning to slow and they are seeing weakening external and internal demand."

The prodding by U.S. officials about China's currency policy comes along with dramatic changes in the diplomatic environment since Paulson helped launch the biannual economic meetings two years ago.

In December 2006, China was a villain in the eyes of many in Congress. U.S. manufacturing jobs were being lost at a rapid pace. Lawmakers from both parties blamed Beijing's strict controls on its currency, also known as the renminbi, which they said unfairly kept its export prices low and hurt U.S. companies.

Now, after spending months battling to save ailing U.S. banks, Paulson will discuss with Chinese officials for the first time in the bilateral talks how to work together to respond to the worsening global crisis. With the U.S. financial system strapped for cash and in disarray, China has increased its position of strength since the talks were last held.

"The Strategic Economic Dialogue in the past used to be focused on the Chinese renminbi issue, but now it's going to be about the American dollar problem and the U.S economic crisis," said Wang Qing, chief China economist for Morgan Stanley.

The global economic turmoil has sparked calls for China to take a leadership position in efforts to stabilize countries on the verge of collapse.

Among the various proposals are for China to take a greater role in the International Monetary Fund. With its enormous foreign reserves -- at $1.9 trillion, the largest in the world -- China could buy power in a global organization that has long been criticized for being dominated by Western nations.

China has chosen to go another way. It has led a push to create a separate, Asia-only fund that would issue loans and offer other assistance to countries in need. China and its neighbors have committed $80 billion to the effort, and there have been discussions about increasing the initial size of the fund to $150 billion.

The proposed Asia Fund goes far further than previous regional initiatives and in certain cases could replace IMF assistance.

Teng Tai, chief economist for China Galaxy Securities, said Asian countries have been frustrated with the IMF because the "IMF makes decisions by a vote mechanism that favors the U.S."

"Asian countries found, that when they got financial aid or a loan from IMF, many rider clauses [were] good for American interest but not for theirs," Teng said.

Manasvi Srisodapol, deputy director-general of Association of Southeast Asian Nations affairs for Thailand, added, "Asian countries feel that if any Asian country suffers from a financial crisis, the countries in the region should help each other out. The idea is a self-help measure." But he cautioned that discussions about the fund were preliminary.

At this week's meeting in Beijing, Paulson said he additionally plans to discuss the commitments already made by the two countries to environmental protection and the development of energy-efficient technologies. The United States and China are the top two consumers of oil in the world.

Also on the agenda is the future of the dialogues once the new U.S. administration takes over in Washington. China's assistant minister of finance Zhu Guangyao said this week that Beijing hopes the high-level talks will continue but needs to "discuss with the Obama administration on whether the dialogue's name and contents should be changed."

Part of the success of the dialogue is the close relationship between former Chinese Vice Premier Wu Yi, China's "Iron Lady," and Paulson. The two have helped their governments hammer out agreements on some of the touchiest issues in U.S.-China relations: the food and product safety crisis in 2007, intellectual property, clean energy cooperation. But progress during the talks seemed to stall when Wu retired last year and Wang Qishan took over her post.

President-elect Barack Obama's new Treasury secretary, Timothy F. Geithner, has had a strong interest in China since boyhood, when his father served as an Asia expert for the Ford Foundation. Geithner studied Chinese at Dartmouth University and spent at least one summer in China.

"Private relationships between top economic leaders did play a critical role in the process of the Strategic Economic Dialogue," said Sun Zhe, an expert on Sino-U.S. relations at Tsinghua University in Beijing. However it's unclear what the chemistry will be between Geithner and Wang.

"For Geithner and Wang, there is a difference in their ages," Sun said. "Their backgrounds are also different. Geithner is a typical technical official, but Wang once was provincial governor."

However, Sun added that even though he is "not sure if they will set up good private relationship, their work relationship should be good" because it is in their mutual interest to collaborate.

Cha reported from Chiang Mai, Thailand. Researchers Liu Songjie and Liu Liu in Beijing contributed to this report.