In a weekend of discussions here, Treasury Secretary John W. Snow had a relentless message for his Chinese hosts: Move faster on financial reforms and, in particular, on letting the Chinese currency float up against the dollar.
Snow cast his pitch as good advice from the Bush administration on how to guarantee financial stability as China moves away from socialism toward a market economy. Allowing the yuan to revalue, he said at a news conference Monday, would enhance the flexibility China needs to stay on an even keel during this transformation. Increased domestic consumption, a lower savings rate and more foreign participation in financial markets also could help, Snow suggested.
"Our discussions on the currency are part of this broad fabric of conversations that we have been having," Snow said before boarding a flight back to Washington. "We're here to encourage our Chinese counterparts to move forward on the reforms they have committed to."
China's Communist Party leaders, however, made it clear they will set the pace of financial reforms -- and the yuan's exchange rate -- according to their own judgment about China's economic interests. That judgment so far calls for caution and a slow, deliberate rhythm, they said.
Premier Wen Jiabao said Friday that the exchange rate will evolve according to "the principles of independent initiative, controllability and gradual progress." Finance Minister Jin Renqing, shortly before meeting with Snow, said China will pursue its currency reforms "step by step," adding that "orders" from other countries will not be heeded.
Behind the exchanges lay conflicting political imperatives. Snow's goal was to move up the yuan's value in order to make Chinese exports more expensive and reduce sales of Chinese goods to U.S. customers. China's trade surplus with the United States was already $107 billion by the end of July, up 27 percent from the same period last year.
Alarmed by the imbalance, Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) have threatened to introduce a bill imposing 27.5 percent tariffs on Chinese imports into the United States unless the yuan is allowed to rise higher. The currency was unlinked from the dollar July 21 and, after being set at 8.11, allowed to float within a narrow band. That move produced an appreciation of about 2 percent against the dollar, which U.S. officials repeatedly have called insufficient.
Snow's Treasury Department must decide in the days ahead whether to condemn China as a "currency manipulator," a decision likely to influence what happens in Congress. At Monday's news conference, Snow called the Schumer-Graham legislation "ill conceived," making clear the administration's reluctance to battle China over the trade imbalance. But he declined to say how his two days of talks with Finance Minister Jin, Central Bank Governor Zhou Xiaochuan and other officials would affect the decision on whether China should be inscribed on the list of currency manipulators.
Instead, Snow described China as a country clearly launched on the path toward flexible currency rates and financial reforms -- but perhaps moving too slowly down that path. During discussions on Sunday and Monday, he said, he formally presented the U.S. suggestions on how to accelerate the reforms.
Snow acknowledged that before the yuan can float freely, Chinese officials must put in place a system of trading platforms and regulatory safeguards, among other steps. "We recognize that it's going to take some time," he said.
In the view of China's leaders, however, more is involved than setting up the machinery for currency trading. While recognizing the need to liberalize China's financial system, they have been increasingly worried by unrest in the countryside, where more than half the country's 1.3 billion people still live.
As economic development puts pressure on land and the income gap widens between rural and urban residents, an estimated 200 million young men and women have left family farms to seek jobs in the city. Were it not for the export-oriented assembly factories in southern China that create jobs for low-wage workers, the number of unemployed and discontented peasants would certainly rise, posing a greater threat to stability. In this setting, analysts said, strong exports remain vital.
"There's only one conclusion: Continuing to bolster labor-intensive production and exports is the only viable means for China to absorb its surplus labor and improve rural living standards," said Qu Hongbin, chief China economist for HSBC Holdings PLC, in a recent opinion article in the International Herald Tribune.