The U.S. and the EU can keep crying. As the article states, and as I know, China will not be easily budged on this issue as their primary concern is Chinese uplift. Their immediate concern is the societal stability and international clout that continued economic development can bring.

Their primary trading partners in the region also do not want China to reevaluate as they have become more integrated economically with China, a reevaluation of the Yuan (Renminbi) would cause inflation. China is currently the largest (or close to) import trading partner of Japan, S.Korea, and Singapore. On the other hand, China does not import nearly as much stuff from these countries as they export, often because these countries finish goods in China and then import to their home market. I do wonder about the countries in ASEAN that direct compete with China though, there opinion might be different.

For China, floating the Yuan or manually increasing the value (monetary policy) will only serve as a catalyst already rising inflation . China has also been trying to generate demand in their home market, by expanding economic opportunity to the inland regions. Since China has 1.3 billion people, unlike smaller nations in the region (i.e. Singapore) or in Europe and much like the United States they have enough potential people to generate a massive economic growth on their own without the intense reliance on exporting. High inflation is an anathema to that goal.

America will also experience some inflation behind this, being that 16% of our imports now come from China (second only to Canada). How much, I’m not certain. This is all political, the American economy is on the verge of stalling and politicians want to point a “nationalist finger”. Reality is, as long as Americans consume above and beyond their means, often from foreign sources, and the U.S. dollar is used as a foreign reserve around the world we will have a trade deficit, especially with China.

As long as it is politically un-sexy to speak in nuance about our trade and monetary policies as compared to our overall foreign policy in the Pacific Rim and how one of those goals is a stable China, America will always be chasing its tail, just as we did with the Japanese in the1980’s. I often wonder how much of this “outrage” over China would not exist if China was in Western Europe. Shinaro Ishihara asked that question about Japan’s trade problems with the West 15 years ago.

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Realigning the yuan: Resistance from G-20

Friday, November 16, 2007

 

FRANKFURT: At a Group of 7 meeting this autumn in Washington, the United States persuaded Europe to join its strategy of leaning on China to revalue the yuan upward, a step that would help ease the pressure on the beleaguered dollar.

But on the eve of a similar meeting of officials from a much bigger group of countries, that achievement may be a tough feat to repeat.

Instead, turbulent currency markets are likely to dominate the meeting of the Group of 20, which comprises central bankers and finance ministers, this weekend near Cape Town.

The forum was created in 1999 to coordinate policy between the major developed economies and the major developing ones.

Heading into the meeting, the United States and top European countries are walking in greater lockstep than ever before, having agreed that the heart of their common problem is China. Beijing suppresses the value of its currency, keeping its exports cheap.

That policy has helped create a U.S. trade gap with China that reached $23.8 billion in October alone. And the euro zone’s trade gap with China surged 25 percent this year, reaching €70 billion through August, the European Union’s statistics office, Eurostat, said Friday.

Mervyn King, governor of the Bank of England, used his quarterly news conference Friday to warn that China was “stoking great currency tensions,” news agencies reported.

But according to currency and policy analysts, it will be difficult to convince the rest of the G-20, which includes China as well as other rising economies like India, Brazil, South Africa and Russia.

China has a track record of firmly resisting such pressure, and some of its neighbors in Asia, especially, would suffer from a stronger yuan.

Yet the weak dollar, which is hovering near an all-time low against the euro, has prompted top officials to search for the right balance of soothing public messages and private persuasion to calm markets and usher in longer-term stability so that global trade is not disrupted by volatile exchange rates.

On Friday, the U.S. Treasury secretary, Henry Paulson Jr. expressed confidence that the U.S. dollar would regain its footing.

“Our economy, like any other, goes through its ups and downs, but I believe the U.S. economy will continue to grow and its long-term strength will be reflected in our currency markets,” Paulson told a South African radio station.

Those comments wrapped up a week that has seen the most verbal intervention in currency markets since late 2004, when the dollar suffered a similar, though less severe, bout of weakness.

Jean-Claude Trichet, president of the European Central Bank, last week called the euro’s rapid rise “brutal.” This is a code word he has used before to signal displeasure with exchange rate gyrations that upend already contracts in international trade and render careful hedging against currency fluctuations worthless.

The comments over the past week may have reflected a conviction that top officials waited too long to support the dollar. They have been wary of wading in, since the $3 trillion-plus turnover in currency markets each day is bound to outweigh their simple words. But as the dollar swung wildly, they acted.

“I understand that verbal intervention has a limited effect, but not saying anything helped feed the dollar’s weakening,” said Stephen Jen, global head of currency research at Morgan Stanley in London.

For the first time, the G-7 communiqué from Washington in October singled out China as the country that needed to free up its exchange rate, which would allow its currency to appreciate, and ease the trade gap.

Europe, notably France, but also some other countries, had previously protested that the dollar, buffeted by waning confidence amid an economic slowdown in the United States, was the real problem.

If investors look to dump their dollars, while China’s exchange rate is inflexible, they have little choice but to buy euros, forcing Europe to bear the brunt of the dollar’s frailty.

Since October, European officials have stepped up their criticism of Beijing, apparently hoping that a more flexible Chinese exchange rate would take the pressure off the euro and temper worries that the strong euro will strangle European exports.

Even Trichet last week called on China to meet the “global responsibilities that inevitably accompany its growing economic clout.”

The United States and Europe will probably make their case privately in South Africa, and virtually no one expects quick agreement there.

Trichet and two other top officials from the euro zone will travel to Beijing on Nov. 27 for two days of talks in which they are expected to press the case for a more flexible exchange rate. Shortly thereafter, Paulson goes to China with other Bush cabinet members in another round of the “strategic economic dialogue” that he began in September 2006.

But it is unclear whether this effort will produce results.

China has said it prizes economic growth above all other goals, meaning that the odds it will move on the world’s time and not its own are long indeed, analysts said.

Keeping its export machine humming provides jobs and underpins the legitimacy of the Communist regime in Beijing, so observers expect China will never make abrupt changes to its exchange rate system.

But this instinct also competes with China’s desire to maintain its prestige in the world. It has worked hard to get membership in major multilateral organizations, notably the World Trade Organization, and fights efforts to isolate it in other institutions like the United Nations.

“A country like China wants to be a member in good standing with the top tier of the club, which is why a multilateral forum matters,” said Gary Hufbauer, an economist at the Petersen Institute for International Economics in Washington.

Still, if the common goal of the Europeans and the Americans is to swing the rest of the world behind their critique of China in South Africa this weekend, the bar may be high, several analysts said.

Perceived European-American bullying, unpopular in global trade talks and probably less so among financial officials, always strikes a sensitive nerve, said Jen, the Morgan Stanley analyst. And not everyone would necessarily welcome a stronger Chinese currency, others pointed out.

A stronger yuan would probably mean a weaker currencies in Indonesia, South Korea and Malaysia, raising the price of imported goods from China and worsening inflation at a time when prices are on the rise globally.

What’s more, the rest of Asia has profited tremendously from China’s rise, even as it has eyed its growing power with a touch of nervousness. The rest of the world, in short, may not be as keen as the United States and Europe to fiddle with a system that has generated unprecedented prosperity.

“They are facing a conflict of their own policy of objectives, even if they did want to see the Chinese revalue upwards,” said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets in London.

“And I’m not sure they want that nearly as much as the G-7.”

Falling Dollar May Spark U.S.-Europe Trade War « Red Alerts

The China trade syndrome « A1exl1’s Weblog

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