- The Washington Times - Friday, March 12, 2010

President Obama is stepping up pressure on China to stop fueling the world’s biggest trade imbalance by artificially depressing the value of its currency, and Beijing is signaling it may soon heed those pleas.

Under political pressure to address burgeoning job losses that many blame in part on China and its aggressive exports policy, Mr. Obama on Thursday reminded the Asian giant that it pledged last year at the Group of 20 economic summit to pare its lopsided trade surplus with the U.S.

Allowing the Chinese yuan, also known as the renminbi, to rise against the dollar in response to market pressures is a principal way of achieving this.

“And as I’ve said before, China moving to a more market-oriented exchange rate would make an essential contribution to that global rebalancing effort,” he said, along with other Chinese measures to increase domestic consumption and rely less on exports to fuel economic growth.

Mr. Obama is under the gun to address complaints - often from members of his own party - that the U.S. is losing jobs and markets to China, after mostly avoiding criticism of China during the financial crisis last year when stability in Asia helped the U.S. and the rest of the world regain economic footing. He has offered a program to try to double U.S. exports and replace millions of manufacturing jobs lost during the recession.

The Chinese usually are obstinate in the face of U.S. criticism, but Chinese leaders signaled this week that the Asian giant may soon relent and start allowing a freer float of its currency against the dollar.

Speaking in Beijing, Yi Gang, the deputy governor of China’s central bank, said that a gradual rise in the yuan is China’s “long-term goal,” and he characterized the strict link China has maintained at 6.8 yuan to the dollar since September 2008 as just an “emergency measure” that was needed to maintain stability and growth in China’s economy during the world crisis.

Analysts took his comments as a clear sign that China is preparing to exit the emergency measures as other central banks are doing and go back to the managed currency float that it instituted between July 2005 and 2008, when it allowed the currency to rise by about 20 percent.

As a result, analysts now expect a change in China’s currency regime as soon as this spring, before the next meeting of the G-20 in June, and they predict the yuan will rise as much as 5 percent this year. That should start to gradually curb the burgeoning U.S. trade deficit with China, which grew to $18.3 billion last month and is averaging more than $200 billion a year.

U.S. and Chinese officials stress that the move is needed as much to cool overheating inflation and property markets in China as it is to assuage tensions with other G-20 countries.

“Expectations of an imminent move in China’s currency are growing” mainly because conditions within China are ripening for such a move, said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

China’s economy has shown signs of overheating after a massive dose of stimulus last year, with growth topping 10 percent, inflation rising at a 2.7 percent rate last month, and property values registering mind-boggling gains. A rise in the yuan would complement China’s efforts to cool the economy by lowering the price of imported goods, tempering inflation pressures.

But Mr. Bennenbroek said China may want to wait until the U.S. dollar is on a clear uptrend against other currencies to minimize the disruptive effect of its own actions. Wells Fargo expects the Chinese currency to resume appreciation by midyear and rise between 6 percent and 8 percent a year after that.

Since China’s currency is widely estimated to be 40 percent overvalued against the dollar, critics say, the gradual change many analysts are predicting will not do much to curb the U.S. trade deficit or China’s unprecedented accumulation of foreign currency reserves, which it amasses as it buys dollars to prop up the U.S. currency. They point to experience with the earlier 20 percent gain in the yuan.

“The change was too small and too gradual even to begin the process of reversing Chinas current account surplus with the world,” said Lloyd Wood of the Fair Currency Coalition, a group that is pushing to penalize China with tariffs on Chinese exports unless it moves quickly to drastically realign its currency.

But other analysts caution that moving too fast could hurt the United States as well as China, since the U.S. is highly dependent on China to finance its huge budget deficits, which surpass $1 trillion for years to come.

Geoff Dyer, a Beijing correspondent for the Financial Times, notes that a sudden 40 percent jump in China’s currency value would make China look like the economic juggernaut many Americans fear by ballooning the size of its economy and military in dollar terms.

“It would catapult China way beyond Japan and leave it half the size of the U.S.” as the world’s second largest economy, he said, while China’s banks and oil companies would suddenly become the world’s largest. “The phrase ‘be careful what you ask for’ works as well in Chinese as English.”