Tag Archive | "Currency"

US Urges China To Lift Restrictions On Investment

The following piece from the Associated Press appeared in the American Iron and Steel Institute’s Daily Media Report.

The U.S. welcomes growing Chinese investment in America, but says China’s restrictions on foreign companies operating there are a major barrier to improving commercial relations, a top official said Wednesday.

Commerce Secretary Gary Locke said Chinese companies are freer to operate in the United States than U.S. firms are in China. American companies are frequently shut out of entire industries or forced to give up proprietary information, he said.

“The imbalance of opportunity is a major barrier to continued improvement of the United States and China’s commercial relationship,” he said, adding that China has recently “narrowed” its commercial environment after a “long and fruitful period of opening.”

He was speaking ahead of annual meetings of the U.S.-China Strategic and Economic Dialogue to be held Monday and Tuesday in Washington. The meetings are also likely to tackle a perennial U.S. complaint over the value of China’s currency, which it says is too low and gives a leg-up to Chinese exporters at the expense of American producers.

Locke, tapped to be next U.S. ambassador to Beijing, spoke at the launch of a report on Chinese investment in the U.S. The study was supported by the Asia Society think tank and the Woodrow Wilson International Center for Scholars.

Chinese foreign direct investment now represents just 0.1 percent of the total in America, according to official figures. But the report said it more than doubled in each of the past two years and is set to grow rapidly. As economic incentives for Chinese firms to operate abroad grow, China’s foreign investment worldwide in the coming decade could total between $1 trillion and $2 trillion.

That could offer hundreds of thousands of jobs and new streams of tax revenue for the U.S. But similar to worries over the emergence of Japan as an investor in the 1980s — that proved unfounded — some Americans fear that China through its sheer size, could gain control of parts of the U.S. economy. The report warned the U.S. risks squandering economic benefits because of political “fear-mongering” about China.

Some major Chinese investment overtures into the U.S. have foundered, such as state-owned CNOOC’s 2005 bid to buy U.S. oil and gas producer Unocal Corp. Some U.S. lawmakers had complained that the sale might jeopardize national security. Technology giant Huawei has also struggled to gain a foothold in the U.S.

The report says the U.S. investment review mechanism — which rejected a Huawei takeover of computer company 3Leaf Systems last year — does an effective job of protecting American security interests, but politicization of the review process would choke off future investment.

The report says Chinese investment in the U.S. during 2003-2010, including projects based on capital raised outside of China, totaled $11.6 billion — about five times higher than official U.S. statistics that are based on balance-of-payments figures. Most investors are private companies, but in terms of value, about two-thirds comes from state-owned enterprises.

Locke said Chinese investment is good for American workers and businesses, but he presented a litany of complaints about the freedom of American companies to operate in China, including intellectual property theft and opaque regulatory measures.

China recently retained prohibitions on foreign involvement in certain industries, despite promises to lift them, and a new review system to vet foreign investments is based on vague parameters of national security, he said.

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May 4, 2011: Former U.S. Senator Slade Gorton’s Testimony

The following testimony can be found here.

Testimony of former U.S. Senator Slade Gorton before The U.S.­China Economic and Security Review Commission hearing on China’s intellectual property rights and indigenous innovation policy

U. S. corporations consistently lose billions of dollars in intellectual property every year due to patent, copyright and trademark piracy and infringement, together with the impacts of Chinese indigenous innovation policies. All in all, not surprisingly, China is the greatest offender.

How to measure these losses presents huge challenges, but let’s start with a study by the International Data Corporation. It estimates China’s software piracy rate in 2009 to have been 79%, with a value of about $7.6 billion. Another study found direct losses to copyright industries in 2005 to have been on the order of $58 billion in lost output and accompanying lost jobs, earnings and tax revenues. A reasonable assumption might be that China accounts for about 25% of this number, or $14 billion.

We can, of course, take for granted that these losses have been matters of great concern to several American administrations and therefore the subject of constant negotiations, the only common feature of which is a lack of success.

And it is, of course, the resulting frustration, coupled with the huge imbalance in our bilateral trade with China, that has spawned retaliatory schemes like Senator Schumer’s proposal to sanction China’s artificial valuation of its currency.

But while I believe that the senator’s ideas stem from an appropriate concern over those trade imbalances and unfairness, I do not feel that his approach is likely to succeed.

We should recognize that the control of a nation’s own currency to the maximum extent possible is in its clear vital sovereign national interest. One need only reflect on the reaction here in the United States to any Chinese attempt to order us to raise interest rates so as to strengthen the dollar to understand and even to sympathize with China’s view on the same subject.

At the same time, however, the protection of our national intellectual property is clearly a vital national sovereign interest of the United States. We have the sovereign right to adjust our trade policies so as to protect that interest. Unfair trade policies should be met by trade sanctions.

Thus, our protection of that intellectual property having been so ineffectual, I submit to you once again an idea first brought to your attention several months ago by my friend, Leo Hindery.

The United States should impose on all imports from China a goods tariff designed to produce each year 150% of the losses of US intellectual property in the previous year. The GAO should determine that number, and the policy should continue for as long as that piracy exceeds an appropriate share of US exports to China, say 10%. The policy should be universal, that is to say it should apply equally to all other trading partners the piracy in which exceeds a certain level. The president should be given some, but very little, authority to waive the policy, in whole or in part, upon a determination that it is in our clear national interest to do so.

The goal, of course, is not to produce revenue for the federal treasury, but to reduce intellectual property piracy, and any degree of presidential discretion should be directed at rewarding success in that endeavor.

It will be objected that this policy violates a number of our international trade agreements, as it does, thus allowing retaliatory trade sanctions against US exports to China, though it should be pointed out that Chinese piracy is so extensive as to constitute such violations as well.

True as that right of retaliation is, and perhaps effective in the case of any trading partner with whom we have a trade surplus, it is clear that a China with a $273 billion surplus (2010) with the United States can only lose, and lose big, by any set of tit for tat retaliatory trade sanctions with the United States.

This general proposal does not, of course, answer all relevant questions. Do we treat patent, copyright and trademark piracy and violations in the same fashion? And what about government indigenous innovation policies? To what extent do they differ from trade secret sharing in the normal course of corporate negotiations? And how do we fairly and accurately determine the losses resulting from IP piracy?

Each of these questions is food for examination by this Commission, but the time for decisive action has already passed and we should not wait on the results of future fruitless negotiations.

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Morici: 4.15.11: Consumer Price Surge, Inflation Highlights Fed and G20 Impotence

The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Inflation Moves to Center Stage, Highlights Fed and G20 Impotence

Today, the Labor Department reported consumer prices were up 0.5 percent in March, driven by 3.5 and 0.8 percent jumps in energy and food prices.

This is the fourth straight month of large gains in consumer prices. While food and energy prices may be volatile, international conditions indicate commodity prices will continue surging, and the Fed’s emphasis on core inflation is absolutely misplaced.

With inflation running at 6 percent a year, it will be tough for the Federal Reserve to deny inflation and continue quantitative easing and low interest rates generally. Similarly, with unemployment likely to remain above 8 percent for the balance of the year, the Fed will find it tough to raise interest rates too much.

The U.S. economy is headed for stagflation thanks to failed banking and international economic policies that lie largely beyond the Fed’s control.

At the heart of the Great Recession and now stagflation are two dysfunctions—problems in U.S. banking, and China’s currency policy and Germany’s privileged position in the EU. For different reasons, but with the same effect, China and Germany enjoy undervalued currencies and protected domestic markets, and are creating imbalances in demand for goods, services and workers globally.

Recent banking reforms have not changed how Wall Street does business—the emphasis is still on trading instead of making sound loans. Whereas before the recession banks made reckless loans—based on the shady practice of pushing loan-backed securities on unwitting investors—now they are starving small and medium-sized businesses for the credit needed to create jobs.

Also, Beijing subsidizes imports of oil and other commodities with the dollars it obtains selling yuan to keep its value low. In the case of oil, it gives to refineries dollars it obtains selling yuan to offset the high price of imported oil. That pushes up oil and other commodity prices globally. Simply, China’s currency policy is a global inflation machine.

In combination, China’s currency policy starves its trading partners of demand for goods, services and workers with subsidized exports of consumer goods and pushes up inflation in those economies by elevating oil and other commodity prices. That makes China’s currency policy a global stagflation machine too.

This week the G20 Finance Ministers, representing the largest developed and developing countries, are meeting in Washington. And again China and Germany block progress. Instead, they prefer to lecture other countries about the genius of their policies, when those policies are nothing more than beggar thy neighbor protectionism, exporting unemployment and fiscal crisis to their trading partners.

The Obama Administration needs to give up on failed multilateral groups and lead concerted action with a few other major nations in responding directly, or as necessarily, act unilaterally to respond to Chinese and German protectionism. If not, Americans can look forward to high unemployment, damaging inflation, falling real incomes, and continuing economic woes.

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As G20 Leaders Set Deal, Geithner Criticizes China

The following article by Liz Alderman appeared in The New York Times here.

China on Saturday at a meeting of the world’s most powerful economies, saying that its currency was still “substantially undervalued” and that recent steps taken by Beijing to adjust its value were too small.

Meeting here over the weekend, financial leaders from the Group of 20 agreed on a set of guidelines to identify when economic and financial developments in some countries would create problems for the rest of the world.

The agreement was forged after France and Germany persuaded China to accept a compromise that includes measuring a country’s currency exchange rate as a gauge of the potential problems.

Even though China has allowed its currency, the renminbi, to appreciate against the dollar since last summer, it has not been enough, Mr. Geithner said. As such, the United States and its European partners say, China still retains an unfair edge in trade that is contributing to a two-speed global economy.

Mr. Geithner’s blunt assessment added to a yearlong drumbeat that the United States has led, aiming to push Beijing to let the value of its currency rise and address its trade imbalance, pressure the Chinese have stiffly resisted.

Nevertheless, China did agree to compromise language on the yardsticks measuring imbalances in the global economy.

China had originally tried to quash efforts to gauge imbalances by looking at real exchange rates and currency reserves, which the United States and other Western countries see as having contributed to the financial crisis.

China has accumulated substantial currency reserves in United States dollars, helping it to hold down the value of the renminbi and run up a large trade surplus.

But China, after discussions with France and Germany, agreed to include those elements in the guidelines, although the rules were softened, along with public and private debt levels.

These guidelines are a “first step,” said Christine Lagarde, the finance minister of France, which is leading the G20 this year.

They grew out of concerns that fast growth in China and other emerging markets would stoke inflation and trade imbalances that could destabilize a recovery, even as advanced countries struggle to overcome lagging growth and high unemployment in the wake of a recession.

Unemployment is expected to stay high for the foreseeable future in the United States and Europe as they recover from the downturn.

Dominique Strauss-Kahn, the head of the International Monetary Fund, said that while the financial crisis was over, “the social crisis is still there, and very strong. If you have growth that doesn’t transform into jobs, what does that mean for the man in the street?” he asked.

Jobs and growth are also a major concern in North Africa and the Middle East, where demands for greater democracy and equality have emerged in part from a paucity of economic opportunity, a concern cited by the leaders gathered here in Paris.

Mr. Geithner, citing the “historic events” that have unfolded in North Africa in the last several weeks, said the United States was committed to working with its international partners to secure “a peaceful and orderly transition in Egypt and Tunisia and support the economic reforms necessary to promote broader gains in living standards.”

One of the major factors fanning wide social unrest in the region, he and others said, were high food and commodity prices.

The International Monetary Fund estimates that commodity prices jumped 20 to 30 percent last year, a trend that Mr. Strauss-Kahn said was “creating a lot of problems for low-income countries and vulnerable people.”

In a separate telephone call with a small group of journalists, Robert Zoellick, the president of the World Bank, said, “We’re reaching a danger point” in these countries. He said he urged G20 officials to “put food first in 2011,” even as they bicker over technical ways to measure imbalances in the world economy.

Mr. Geithner said the United States would support measures to limit the potential for the manipulation of commodity prices through greater transparency and oversight of the commodity and derivative markets, which some critics worry are being used by speculators to drive up commodity prices.

Beijing’s currency policy has helped stoke a breakneck pace of growth in China that, together with other emerging markets, has been cited as a contributing factor in the runup in food and commodity prices.

Not surprisingly, each country is pursuing its own self-interest to resolve internal economic problems. These include high unemployment in the United States and difficult austerity measures in Europe, as countries tighten their belts to mend finances.

“It’s very difficult to see any government doing something in its fiscal affairs just to benefit the broader system,” Jacob Frenkel, the chairman of JPMorgan Chase International, said in Paris last week at a meeting of the Institute for International Finance.

Cajoling Beijing, however, is a losing proposition, Mr. Frenkel said, because the Chinese don’t want to be seen as being pushed around.

Instead, he said, governments should tell China they understand why it has a savings glut, “and then say, ‘Let us help you design a system that helps you save less,’ ” he said. “That would be a win-win strategy,” he said.

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Lawmakers to relaunch China currency bill Thursday

This article appeared on the Reuters site here on February 9, 2011.

(Reuters) - A bipartisan group of lawmakers plan to begin a new drive on Thursday for China currency legislation that was approved last year by the House of Representative but failed in the Senate.

The lawmakers include Representative Sander Levin, the top Democrat on the House Ways and Means Committee, who spearheaded last year’s successful push to pass the bill in the House by a bipartisan vote of 348-79.

They have scheduled a mid-afternoon press conference on Thursday to discuss the legislation.

The bill would clear the way for the Commerce Department to treat undervalued currency as a subsidy under U.S. trade law. That would allow companies, on a case-by-case basis, to seek higher countervailing duties against imports from China that compete with U.S. production.

Despite the strong House vote, the Senate failed to take up the measure and it died at the end of last year.

The bill faces tougher going in the House now that Republicans control the chamber. However, supporters remain hopeful Congress will act if China doesn’t take steps to allow its currency to rise more quickly against the dollar.

Critics saying China’s yuan is undervalued by 15 percent to 40 percent against the U.S. dollar, giving Chinese companies an unfair trade advantage.

(Reporting by Doug Palmer)

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A Hot Topic for Davos: China’s Big Challenges

The following piece by David Barboza was published on January 24, 2o11 and can be found here.

SHANGHAI — The seemingly unstoppable rise of China has long been high on the agenda at the annual meeting of the World Economic Forum in Davos, Switzerland. This year, though, the discussion is likely to include a greater focus on major challenges facing the country.

China is already the world’s biggest exporter and has the second largest economy after that of the United States. The country has $2.9 trillion in foreign exchange reserves and is pushing to build its first aircraft carrier and to land a spacecraft on the moon within two years.

But there are also potential problems ahead in 2011. At home, there are growing worries about inflation, including rising property prices and the possibility that a widening income gap between the rich and the poor could threaten social stability.

On the international front, China is struggling with trade frictions over its currency policy and coming off what analysts say was a year of diplomatic missteps.

Minxin Pei, who teaches political science at Claremont McKenna College in California, said China undermined its standing last year with a more assertive and erratic posture in foreign affairs.

Among other things, he said, China needlessly confronted the United States over the sale of weapons to Taiwan, berated Japan for its decision to detain the captain of a Chinese fishing trawler and lashed out at the West in an exaggerated way after Norway awarded the Nobel Peace Prize to Liu Xiaobo, a Chinese dissident.

‘”This may reflect the nature of the regime and its autocratic system,”’ Mr. Pei said. “But in the end, they’re pragmatists. They’re not led by blind megalomaniacs. So there may be some adjustments. There is some hope.”

Sensing discord in its foreign relations, China has responded in recent months with what some analysts see as a series of charm offensives.

Delegations of high-ranking Chinese leaders have traveled to world capitals to sign multibillion-dollar trade and investment deals. In Europe earlier this month, Chinese leaders pledged to support the euro, in part by buying the sovereign debt of some weakened euro zone members.

And when President Hu Jintao of China visited Washington last week, China signed business deals that promised to create a quarter-million American jobs. Beijing also tried a dose of soft power by releasing a promotional video showing positive images of China and Chinese celebrities. The images were broadcast on a giant television screen in Times Square in New York.

But those efforts had been undermined by diplomatic stances that seem increasingly hardheaded, said Orville Schell, director of the Center on U.S.-China Relations at the Asia Society in New York.

“There’s a muscular resistance to any kind of cooperation that might seem like yielding to U.S. demands and interests,” Mr. Schell said. “For the last hundred years, China has wanted to be in the position where it’s not pushed around. And now they are close to that.

“It should be a sweet moment. But when such cooperation even so much as hints at submission, it becomes difficult. Especially at a high, visible level, this concern makes the give-and-take that is essential in working out common problems very difficult.”

Other analysts say the United States and Europe need to accept some of the blame for souring relations. Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, said the West often demonized China, and Western leaders tended to lecture the Chinese in a way that could be seen as disrespectful and which was likely to fan resentment among Chinese officials.

“The West is terrified because they’ve dominated history for the past 200 years and now China’s emerging,” Mr. Mahbubani said. “But we should all recognize that a multipolar world is much better than a unipolar world.”

Still, the ruling Communist Party’s chief concerns this year are internal, analysts say. Chief among them are maintaining strong economic growth, which helps improve the livelihood of its citizens but also reduces the likelihood of social instability and challenges to the party.

To strengthen the economy, the government has promised to rein in inflation and soaring property prices. Several big cities are considering new property taxes. And local governments have announced plans to build more low-income housing.

Many economists have forecast another year of stellar economic growth, with the Chinese economy expected to grow about 9 percent. Yet concerns remain about overly aggressive lending by state-run banks.

Since early 2009, Chinese banks have engaged in a record lending spree that has helped back state-owned companies and financed huge infrastructure and property projects. Analysts say the policies probably encouraged loose lending standards, which could increase the likelihood of a sharp rise in nonperforming loans — something that seriously threatened state-run banks less than a decade ago.

The government has also pledged to restructure the economy, moving away from a heavy reliance on exports and government investment and toward more domestic consumption.

Chinese leaders are supporting efforts to increase the wages of average workers and are encouraging more investment in inland provinces, which have lagged far behind the nation’s coastal cities.

But getting Chinese consumers to spend more will not be easy, analysts say, particularly in a nation with a relatively weak social safety net.

Another barrier to change is what some analysts say is a quiet shift in government policy away from market-oriented changes toward ones that back state-owned companies and so-called national champions.

Two recently published books argue that China has been moving away from Western-style capitalism toward what is called state capitalism, in which the government and state-owned companies team up to dominate business and the economy and compete with multinational corporations from abroad.

In “Red Capitalism,” Carl E. Walter and Fraser J.T. Howie, wrote that the Chinese government’s efforts to change the nation’s banks and financial system had stalled from 2003 to 2005 as various government agencies battled for control over the banking system.

While the outside world sees a vibrant Chinese stock market, splashy initial public offerings and new billionaires — all ostensibly signs of an increasingly market-oriented economy — the reality, they say, is a system in which the state manipulates the markets to raise huge sums of money and then forces the banking system to make wasteful loans to state-owned companies.

The real turning point came after the financial crisis, when China lost confidence in Wall Street’s financial model, said Ian Bremmer, president of Eurasia Group, a consulting firm, and author of “The End of the Free Market: Who Wins the War Between States and Corporations?” China then began adopting a system that allowed the state to use its assets to move markets and strengthen support at home.

This, Mr. Bremmer said, will drastically alter the relationship between China and Western countries like the United States, generating more conflicts over jobs and market access.

“This has certainly changed the calculus,” Mr. Bremmer said in an interview. “This means the most important economic relationship in the world will become an increasingly zero sum game.”

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Morici: 1.21.11: Post Mortem on the U.S.-China Summit and House Republicans Health Care Repeal

The following was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

This week President Obama made big news meeting with China’s President Hu, as did House Republicans passing legislation to repeal the recent health care reform law. Both accomplished little for the history books.

U.S.-China Summit

The summit joint-communiqué indicated the two leaders and their governments agreed to continue their relationship as it has been these last several years, and not to tackle difficult conflicts in the realms of economics (e.g., the undervalued yuan, Chinese discrimination against U.S. companies operating in China, and U.S. export prohibitions on civilian technologies with potential defense applications), human rights (e.g., political prisoners and censorship), and security (e.g., China’s air and naval buildup and the American naval near China).

That said, the summit was a big success for the two leaders. The moderate path toward China adopted by President Obama and President Hu’s meeting with U.S. CEOs shored up President Obama’s efforts to present himself to voters as moving toward the center (Americans don’t like confrontation) and as becoming more business-friendly. President Hu got the recognition China has been seeking as a world power and equal to the United States in the Pacific and on a wider global stage.

Regarding economic issues, President Obama squandered a key opportunity. Most folks that understand economics recognize China’s undervalued currency is slowing U.S. growth and contributing to U.S. unemployment and wage stagnation-the chorus includes liberals like Nobel Laureate Paul Krugman, conservatives like Ben Bernanke, moderates like Peterson Institute Director Fred Bergsten, and myself.

Over the last two years, Krugman and Bergsten have joined me in recommending offsetting U.S. actions-some kind of tax on imports or currency conversion, or currency market intervention. Bernanke cannot suggest policy responses as Chairman of the Federal Reserve-exchange rates are a Treasury issue.

The President has publically stated the United States has options if China won’t revalue its currency. Also, the United States could mirror China’s procurement and technology policies that discriminate against U.S. exports into China and sales of U.S. firms operating in China.

In the past, presidents have been politically constrained against taking action by a basic divide in the business community-U.S. firms facing import competition from China want direct U.S. action but U.S. firms established in China were satisfied enough not to want to upset Beijing with provocative U.S. initiatives.

This year matters came to a head-both groups are complaining loudly about China. President Obama could have taken a much harder line with President Hu, and carried through on actions to offset Chinese protectionism if China does not move substantially on U.S. concerns.

Instead, President Obama continued to rely on failed tactics of the past-he asked President Hu to act, and President Hu said no. President Obama facilitated a meeting between U.S. exporters and firms operating in China with President Hu, while those U.S. firms competing with imports from China got stiffed. In doing so, he helped President Hu, once again, divide the U.S. business community, but President Obama accomplished little to change China’s policies.

President Obama even let pass rather provocative statements by President Hu regarding the dollar’s status as a reserve currency. President Hu was ungracious in those comments, especially considering the treatment and help he received from President Obama.

Most of the announced new deals for U.S. exports into China were going to happen anyway and do not amount to a lot against a one trillion dollar bilateral trade deficit over the next three or four years.

On human rights, President Obama did get a small victory. For the first time, President Hu mentioned universal human rights-that concept implies sovereign governments are accountable to international norms. That is something Chinese leaders and the Communist Party have viewed as a direct affront to China’s sovereignty.  Whether President Hu acknowledging this concept results in substantive changes in Chinese behavior is another story. China’s internal treatment of dissidents goes to the heart of the Communist Party’s strategy of permitting criticism with prescribed boundaries but squelching dissent it views as destabilizing.

The summit was great theater but accomplished little for the United States, but it score political points domestically for both presidents.

Health Care

House Republicans passed a health care reform repeal bill with no meaning. It is dead on arrival in the Senate. Republicans do have the opportunity to offer amendments to the new law by attaching more modest revisions to appropriations bills or by offering more narrow legislation to Senate but they really don’t have any great ideas to offer.

Nothing the Republicans talk about really deals with the two most fundamental problems-the lack of health insurance coverage for 50 million Americans and the much higher cost of health care in the United States than in Europe. Germany and Holland, for example, have private health insurance, universal coverage and spend 12 percent of GDP on health care, while the United States has huge coverage gaps and spends 18 percent. Simply, those countries have tackled the tough cost problems-health care bureaucracies, hospital management, overuse of services, the high cost of drugs, and civil litigation. Neither the President’s new law nor what the Republicans propose to replace it effectively addresses those cost issues.

Proposals offered by Republicans come down to retreads of old failed ideas of the past-medical savings accounts, vouchers to buy health insurance, etc.

The Republicans are squandering their mandate by putting on a big show and accomplishing little.

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Hu says U.S. Must Respect Sovereignty, Rejects Yuan Argument

The following piece appeared on Bloomberg.com.

Chinese President Hu Jintao said greater cooperation with the U.S. on economic and security issues must include recognition of each nation’s sovereign rights as he rejected American arguments for yuan appreciation.

Hu, who will arrive in Washington tomorrow for a state visit, said the two nations should abandon the “zero-sum Cold War mentality.” He cited trade, energy and terrorism as areas for strengthening cooperation, according to a transcript of answers to written questions from the Wall Street Journal and the Washington Post.

“We should respect each other’s sovereignty, territorial integrity and development interests,” Hu said. Inflation can’t be the “main factor” in determining yuan gains, he said, after U.S. Treasury Secretary Timothy F. Geithner said Jan. 12 that higher prices in China will lead to “necessary” exchange rate adjustments.

Allegations of unfair Chinese treatment of foreign companies, the awarding of the Nobel Peace Prize to jailed dissident Liu Xiaobo and China’s refusal to condemn North Korea’s shelling of a South Korean island have been sources of tension since President Barack Obama visited China in 2009.

“The biggest achievement for this trip will be a strengthening of mutual trust and setting a tone for future strategic development,” said Liu Qin, a researcher at the China Institute on International Studies in Beijing. “This visit serves as a connection point for the next generation of Chinese leaders and will lay a solid foundation for the next 10 years.”

Congressional Meetings

Hu’s visit from Jan. 18-21 will include meetings with members of the U.S. Congress and a visit to Chicago. Chinese Commerce Minister Chen Deming and Lou Jiwei, chairman of the nation’s sovereign-wealth fund, will accompany Hu.

In response to the newspapers’ questions, Hu said China had adopted a “package plan” to curb inflation, including interest-rate adjustments. On Jan. 14, the central bank ordered lenders to set aside more deposits as reserves for the fourth time in three months, draining cash from the economy to cool price pressures. Hu said that the increase in the cost of living is “on the whole moderate and controllable.”

Prices are climbing faster in China than in the U.S., making Chinese goods less competitive, Geithner said last week. Speaking in Washington on Jan. 12, he said that while the yuan was still substantially undervalued, the “fundamental forces that are pushing Chinese productivity growth and are pushing inflation higher will bring about the necessary adjustment in exchange rates.”

The yuan fell for the first day in five today, trading at 6.5950 per dollar as of 10:48 a.m. in Shanghai.

Dollar’s Role

The dollar’s primacy as a reserve currency and in trade is “the product of the past,” Hu told the newspapers. He pointed to China’s effort to expand the role of the yuan in cross border trading and investment, while acknowledging a “fairly long” road to making it a fully fledged international currency.

U.S. lawmakers argue that an undervalued yuan hurts American manufacturers and widens the trade deficit with China by holding down the price of exported Chinese goods.

While “there are some differences and sensitive issues” between the two countries, Hu said, “we both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

In an allusion to the Federal Reserve’s policy of buying $600 billion of Treasuries to stimulate the economy, Hu told the newspapers that U.S. monetary policy has a “major” impact on global liquidity and on capital flows.

Foreign Investment

Hu pledged to continue to improve laws and regulations concerning foreign investment, and to offer a stable and transparent legal and policy environment. U.S. companies’ “innovation, production and business operations in China enjoy the same treatment as Chinese enterprises,” he said.

China will continue to develop a “socialist democracy,” the Chinese president said. He called for an “increased dialogue and contact” with the U.S. and said the countries should “respect each other’s choice of development path.”

Hu answered only some of the questions submitted by the newspapers, not addressing one about Nobel Peace Prize winner Liu and another on China’s growing naval power, among others, according to the Journal.

China has “made relentless efforts to help ease the tension” between South Korea and North Korea and “pays a great deal of attention to the Korean nuclear issue,” he said. China stands “for achieving denuclearization of the peninsula in a peaceful way through dialogue and consultation to maintain peace and stability of the peninsula and Northeast Asia,” the president added.

-Sandrine Rastellow in Washington, Yidi Zhao in Beijing.
Editors: John Liu, Paul Panckhurst.

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China Criticizes U.S. Senate’s Plan For China Currency Measure

The following article appeared in Newsweek on December 14, 2010.

A proposal by U.S. senators to include a China currency measure in legislation to allow for higher duties on imports is based on an inaccurate analysis and assessment of U.S.-China trade relations, Yao Jian, a spokesman for China’s commerce ministry said at a regular briefing in Beijing today.

U.S. export controls are a key factor behind the trade imbalance between the two countries, he said.

The U.S. should recognize China’s market economy status, lower barriers for Chinese investment and facilitate agricultural exports to the U.S., he said.

Posted in CurrencyComments (3)

12.3.10: Fair Currency Coalition Fact of the Week

Still No Meaningful Rise in RMB’s Value After Nearly Six Months;
Time for U.S. Senate to Pass H.R. 2378, the House-Passed Currency Bill

hortly before the G-20 last June, the People’s Republic of China’s (PRC) announced that it would further reform its currency regime and enhance the flexibility of the renminbi (RMB).  The People’s Bank of China (“PBC”) explained that this step was being taken “{i}n view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China….”

Since then, the value of the RMB has barely risen in real terms relative to the dollar.   On June 21, the PRC-set value of the RMB was 6.8275 to the dollar.  This morning, the value was reset at 6.6605 to the dollar, a rise of less than 17 one-hundredths of one RMB — a modest 2.3 percent.  Indeed, over the past six weeks, there has been no net appreciation at all.  This is another case of actions speaking louder than words.

Ironically, the suspension of RMB appreciation coincides with rising concern in China over inflationary pressures.  The Chinese consumer price index is up by 4.4 percent year on year, with food prices soaring by more than 10 percent.  Hot money continues to flow into China, feeding asset bubbles in sectors such as real estate.  The Chinese government sees the connection between its inflation problem and its currency policy.  Hu Xiaolian, deputy governor of the central bank, said in a speech last month:  “In a situation when expectations of renminbi appreciation continue strengthening, international liquidity will continue to flow in, adding to upward pressure on prices of goods and assets and making liquidity management more difficult.”

In a functioning market economy, a stronger currency would be a normal response to these conditions.  In China’s system of state capitalism, however, that is not permitted.  The record makes that abundantly clear:  as concerns in China about inflation rise, the rate of RMB appreciation falls to zero.   The Chinese system will continue to defend their interests without regard for market forces.  Thus, there is little reason to expect that the undervaluation of the RMB will resolve itself.  Instead, the United States must take steps to defend its own interests.

Adding to the urgency of the situation, the Obama administration, led by U.S. Treasury Secretary Timothy Geithner, has made it clear that global imbalances must be reduced for the United States to accelerate economic growth and jumpstart the creation of the millions jobs lost in the last decade.  The administration’s self-proclaimed linchpin to achieving this goal has been negotiations to revalue the dollar fairly relative to the undervalued currencies of trading partners, like China, that are running excessive current account surpluses with the United States.  This morning’s hugely disappointing jobs data, including the loss of another 13,000 manufacturing jobs, underscore Geithner’s concern.

Senate passage of H.R. 2378 would arm Secretary Geithner with the negotiating leverage he needs to persuade the PRC that allowing the RMB to rise in value is in its best interest.   H.R. 2378’s countervailing duty remedy allows the United States to combat prohibited export subsidies like illegal currency undervaluation through WTO-consistent means.  Since actions speak louder than words, legislative action to demonstrate American seriousness to resolve the undervalued RMB problem would give China far more incentive to negotiate an orderly rise to the RMB in good faith.  That’s action that really would stimulate economic growth and job creation in the United States.

The Fair Currency Coalition is an alliance of industry, agriculture, and worker organizations whose mission is to support production in and export from the United States by seeking an end to the practice of currency misalignment by any trading partner.  See the list of trade associations, labor organizations, and companies that support enactment of H.R. 2378 by visiting www.faircurrency.org.

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