Wednesday, December 3, 2008

US, China headed for possible currency clash

Media picking up on this now.

BEIJING (AP) - The deepening world economic crisis and a possible spat over currency levels hung in the air as the United States and China sat down Thursday to discuss the future of their economic relations.
U.S. officials say Treasury Secretary Henry Paulson will press Beijing to let its yuan rise against the dollar to ease trade tensions at the two-day Strategic Economic Dialogue. American companies contend that China keeps the yuan undervalued, giving its exporters an unfair advantage and adding to its swollen trade surplus.

But with China's exporters suffering, the yuan plunged Monday in government-controlled trading—a possible message to Washington to go easy on the issue.

"The signal China sent on Monday is: We also have our own political problems and issues in a slowing economic environment," Frank F.X. Gong, chief Asia economist for JPMorgan Securities Ltd., said in a report to clients.

State media said Thursday a rapid rise of the Chinese currency would harm the global economy further as it would hurt Chinese exports and increase unemployment.

"China's foreign exchange policy should be aimed at helping domestic economic growth, for which the yuan should not rise too fast against the U.S. dollar now when the global financial market is in turmoil," said a report Thursday in the China Daily, an English-language newspaper aimed at foreign readers.

The twice-a-year dialogue, launched in 2006, is meant as a relationship-building exercise rather than a forum for negotiation. But Treasury Undersecretary David McCormick told reporters this week that officials at the dialogue would urge China to continue allowing the yuan to rise—a key issue for American lawmakers who are pressing for punitive action if Beijing fails to take faster action on trade complaints.

Both economies are struggling—the United States with a recession and China with a sharp slowdown in growth—and how well they keep one of the world's biggest trading relationships stable and productive could be of global importance.

"The need to coordinate and collaborate gets even more urgent as the current recession bites deeper," the China Daily said in an editorial Thursday.

The talks are to cover a broad agenda, including cooperation in energy conservation and environmental protection. Paulson's delegation includes the U.S. secretaries of agriculture, labor and health, the U.S. trade representative, officials of the Treasury and Commerce departments, and others.

Agreements on product quality, food safety and trade and investment could be signed, the newspaper said, citing sources with the Finance Ministry.

Beijing broke a direct link between its yuan and the dollar in July 2005 and has let its currency rise by about 20 percent since then. That has hurt Chinese exporters, which are seeing their goods get more expensive in foreign markets just as demand slows.

In a speech Tuesday, Paulson said it was important for China to stick to its currency reforms and rely more on domestic demand to drive growth.

"As I have said in the past, continued reform of China's exchange-rate policies is an integral part of this broader reform process," Paulson said.

The yuan's fall Monday was its sharpest one-day fall since 2005, erasing almost 1 percent of its value against the dollar.

Gong said Beijing's move might have been meant as a warning to President-elect Barack Obama, who has yet to say whether he will continue the dialogue, that talking will be more effective than confrontation.

"Our negotiators do disagree, and even quarrel from time to time. But the beauty of the SED lies in the fact that they have a platform to talk face to face," the China Daily said. "Listening to each other is conducive to avoiding ill-informed decisions."

Chinese exporters have lobbied the government to slow or reverse the yuan's rise against the dollar to make their goods more competitive abroad. But Gong said Beijing understands the problem is lack of demand, not price, and is likely to let the yuan continue to rise over the long term.


googleheim said...

China's needed investment domestic demand should help them realize what poisonous crap they are sending overseas to the USA and elsewhere. There's a quality issue they need to address and hopefully this will met with them taking on their own makings.

googleheim said...

Some Tidbits for Frischburger and the Norman :

a. If you remember when steel was dumped on US ports by India, China, Korea, Japan, and South Africa during the commodity dollar store days in the late 1990's when oil was $0.81 per gallon in some Gulf Coast cities, the USA put up steel tariffs up to 30%.

The EU threatened George Bush with a trade war so the USA had to remove the tariffs.

However, the USA came back with an pro-export weak dollar policy that made it impossible for the steel dumping to come back again.

Also, commodity prices rose - so steel stayed local in some respects, oil prices prevented massive transport of steel, and so forth.

So if we are back to the late 1990's, the question is if Igor's analysis should be focused on to the Asian Tigers - is this region really so insulated ? i.e. the commodity price down turn could create a currency melt down in Asia ?

b. Oil prices have gone down and all the middle of the road analysts are looking for a final stable oil price of $70 / barrel.
Are the currencies going to decouple from the price of oil since central bank interest rate declines will govern currencies more than oil prices ? eg UK banks to decrease rates by 2 basis points in December - quid goes down but oil is stabilizing ?

mike norman said...

Oil is priced in dollars, so the price of oil has a strong influence on the exchange value of the dollar, not the other way around. At $150 per bbl nations would have to run much higher trade surpluses with the U.S. to get the dollars they need to purchase oil. Investors see a rising U.S. trade deficit and sell the dollar.