Geithner visits China as currency plan appears to take shape

By Keith B. Richburg
Friday, April 9, 2010; A15

SHANGHAI -- Treasury Secretary Timothy F. Geithner met with a top Chinese official Thursday for talks, amid growing signs that China may be preparing to allow its currency to strengthen modestly.

Although there were no public statements following the meeting between Geithner and Chinese Vice Premier Wang Qishan, economists and analysts here said Beijing is considering allowing the yuan's value to gradually increase up to 3 percent this year. That would help quiet U.S. criticism that the yuan is purposefully undervalued in order to make Chinese exports cheaper on world markets.

Analysts said the main concern now was preventing foreign speculators from profiting on the planned appreciation.

A series of moves by the United States and China in recent days has seemed carefully choreographed to head off confrontation over the currency issue and to convey the message that any adjustment would be a unilateral decision by Beijing.

Two days after China announced that President Hu Jintao would travel to Washington next week for a multilateral meeting on nuclear arms security, Geithner announced Saturday that the Treasury Department would postpone its report on foreign exchange rates due April 15, which could label China a currency manipulator.

The Chinese regard the value of their currency, essentially pegged to the dollar, as a nationalist issue, and officials have publicly vowed never to bend to foreign pressure or interference.

Using harsh rhetoric, Chinese analysts writing in the state-controlled news media have referred to the pressure as a kind of "new imperialism."

Despite the strident language, most Chinese economists and scholars have concluded that the yuan, also called the renminbi, is indeed undervalued and that an adjustment would benefit the Chinese economy by spurring domestic consumption.

"There's a consensus among academics and scholars that we should revalue -- no debate," said one senior Chinese economist familiar with the government's position, who spoke on the condition of anonymity in order to speak candidly. "Any independent mind would recommend a flexible exchange-rate regime as in the best interest of China. That's very clear."

He added: "We cannot let the trade surplus go on forever. The end is the edge of the cliff."

This week, Chinese officials began shifting their tone on the currency question, leaving open the possibility of a more flexible exchange rate within a designated scope. In the clearest sign, Ba Shusong, a senior government economist, told reporters Tuesday that the government would consider widening the daily trading band of the yuan and that it might resume the slow appreciation of the currency that was stopped in July 2008, at the height of the world financial crisis.

Around the same time, Zhang Yansheng, the top official at a leading government economic think tank, told reporters, "We don't want to see our exchange rate kept unchanged," according to Reuters.

Some analysts said it was crucial for China to be seen domestically as pushing back against pressure on the currency, even while recognizing that it was time to make some concession.

"We will not increase the value of the renminbi under the pressure of other countries," said Xia Liping, a professor specializing in U.S.-China relations at Tongji University in Shanghai. "We'll do it step by step."

Xia said the yuan probably would be allowed to increase only 3 percent a year at most in order to avoid domestic upheaval, such as mass unemployment in the export sector. Some Western economists have said the yuan is undervalued between 20 percent and 40 percent.

Xu Mingqi, a leading economist with the Shanghai Academy of Social Sciences, said the heightened U.S. criticism had actually made revaluation more difficult, because Chinese leaders could not be seen addressing a U.S. demand at a time of heightened tensions.

"The Chinese government is in a kind of dilemma," Xu said. "If it adjusts [the currency] just after the U.S. government raises the issue, they can be seen as giving in to this pressure. They have to wait until the right time, and not give in to the pressure from the U.S. side." However, he said, "the Chinese side is already thinking of relaxing its peg to the dollar."

Xu said both Washington and Beijing had learned the value of toning down the rhetoric, keeping the talks out of the public view and not issuing ultimatums or threats.

"Behind-the-scenes discussions will be more helpful to both sides," Xu said. "Both sides understand the need to talk privately."

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