China Currency Issue Heating up on Eve of US talks

A decline in the Chinese currency's value against the U.S. dollar after months of hovering in a narrow range is threatening to bring the long-simmering issue to full boil as U.S.-China economic talks get under way in Beijing.
In Washington, U.S. Treasury Secretary Henry Paulson said Tuesday that Beijing must keep letting the yuan rise against the dollar to help ease trade tensions with the United States.

Signaling potential for a renewed tensions over the issue, the state-run newspaper China Daily ran a front-page article Wednesday morning headlined: "US urged not to harp on currency issue at talks."
It cited analysts arguing that Beijing might need to devalue the yuan, thus making goods made in China cheaper, to help its exporters weather the global recession.

"Pushing for a rising yuan now will be a lose-lose move for both China and the U.S.," the China Daily cited Zhou Shijian, a researcher at Beijing's prestigious Tsinghua University, as saying.
He said China would prefer to see the high-level talks Thursday and Friday in Beijing, known as the Strategic Economic Dialogue, focus on cooperation in energy and the environment.

The Chinese yuan was at 6.8783 late Wednesday in Shanghai. It closed last Friday at 6.8254 but jumped to above 6.88 Monday last Friday. The currency last traded above 6.8800 in June, and had hovered near 6.8300 in recent months after advancing against the dollar earlier in the year.
American manufacturers have long contended that the yuan is undervalued, giving Chinese companies an unfair edge and contributing to the record trade gap between the two countries. President-elect Barack Obama has said he will pressure Beijing to end what he calls the manipulation of its exchange-rate system.

China keeps the yuan trading in a relatively narrow range against the U.S. dollar, saying it needs to keep its currency stable while gradually loosening controls. It gained points with its neighbors for refraining from devaluing the yuan during the Asian financial crisis of the late 1990s.
Propping up exports runs counter to Beijing's policy of focusing on stimulating domestic demand. But the failure of thousands of factories hit by a slump in demand for Chinese-made products has raised worries over politically sensitive job losses.

Before this week's abrupt decline, the yuan had risen in value by more than 20 percent against the dollar over the past three years, taking some of the heat out of the issue. The U.S. dollar's rebound against the euro and other major currencies had further boosted the yuan's value, adding to pressure on exporters.
"If the dollar continues to rise against the euro, we will have to further adjust the renminbi," the China Daily and other reports cited Pei Changhong, director of the government-affiliated Institute of Finance and Trade Economics, as saying at a news conference in Beijing.

He called such adjustments "reasonable and necessary."

The Chinese currency's sudden drop Monday, when it fell 0.7 percent to close at 6.8848 to the U.S. dollar, was unexpected, analysts said.
But it did follow comments by China's central bank governor, Zhou Xiaochuan, that he would not rule out a devaluation of the yuan to help promote export growth.
"It seems the central bank is taking steps to depreciate the yuan to help boost export industries, due to the grim economic outlook. It could be seen as part of the country's stimulus policy," said Feng Yuming, an analyst at Oriental Securities, in Shanghai.

Still, Beijing's scope for depreciating the yuan is limited given the country's massive trade surplus and its huge and surging foreign exchange reserves.
Indicating a degree of controversy over the issue, some Chinese analysts argue that resorting to devaluation could cause capital to flee to other countries whose currencies are expected to gain in value. It could also trigger competitive devaluations by rival exporting nations.

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