US sees China moving on currency despite rhetoric

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Treasury Secretary Timothy Geithner voiced optimism on Thursday that China would begin letting its currency appreciate, despite Beijing's dismissal of US complaints that Chinese policies put American exports at a disadvantage.

Geithner's comments to lawmakers came a day after President Barak Obama vowed to get tough on trade and exchange rates - putting currency high on a growing list of bilateral disputes that includes Taiwan, Tibet and cyber security.

"I think it's actually quite likely (China) will move. I think they recognize it is important to them, in their interest as well," Geithner told the US Senate Budget Committee.

He said correcting currency misalignments was a key part of US efforts to get the world economy growing on strong consumption and domestic demand, and "not on the basis of an investment-led, export-heavy model again."

"And that requires a level playing field for American exporters generally and we're going to work very hard to encourage those changes," Geithner added.

Earlier on Thursday in Beijing, a Chinese Foreign Ministry spokesman dismissed Obama's concerns, saying its currency was at a reasonable level and that China did not deliberately pursue a trade surplus with the United States.

"At the moment, looking at international balance of payments and forex market supply and demand, the level of the yuan is close to reasonable and balanced," Ma Zhaoxu told a regular news briefing, repeating China's standard line on its currency.

"Accusations and pressure do not help to solve the problem," he added.

The Foreign Ministry has no say in China's currency policy, which is driven mainly by domestic considerations, such as the need to maintain rapid economic growth and provide jobs.

Markets unmoved

US manufacturers have complained for years that China deliberately holds down the yuan, giving local exporters an unfair price advantage. China says exchange rate policy is an internal matter.

Analysts in China cautioned against reading too much into Obama's comments, saying his words were as much aimed at a domestic audience as trying to put pressure on Beijing.

"Even if China wants to adjust its exchange rate, it is nearly impossible for Beijing to meet the demands of the US - this is China's own business," Li Jian, a researcher with a think-tank under China's Ministry of Commerce, told Reuters.

But US trade expert William Reinsch said Obama's remarks came amid growing US frustration with a China that is "engaged in a variety of bullying activities" on Taiwan and Tibet, while not moving to resolve trade imbalances.

"When you're faced with an economic policy that is not addressing the imbalances in their own economy, much less the global problem, the normal reaction is to take some action of your own," said Reinsch, president of the National Foreign Trade Council.

Markets, however, were not counting on a brisk rise.

"Previous tough comments on the yuan from the US administration have typically led nowhere," said a US bank dealer in Shanghai. "The market is not sure the latest comments by Obama will really lead to a tougher US stance on the yuan."

Offshore one-year dollar/yuan non-deliverable forwards (NDFs) , a rough gauge of market sentiment, on Thursday implied a 2.8% rise in the yuan over the next 12 months, slightly less than on Wednesday. The yuan's spot exchange rate, which is tightly controlled by the central bank, was nearly flat.

Yuan seen as undervalued

Obama told Senate Democrats on Wednesday that Washington was trying "to get much tougher about enforcement of existing rules, putting constant pressure on China and other countries to open up their markets in reciprocal ways."

Obama said he would not take a protectionist stance toward China, arguing that "to close ourselves off from that market would be a mistake."

The Peterson Institute for International Economics in Washington has estimated that the yuan is undervalued by about 40% against the dollar.

Underscoring US concerns, Republican Senator Charles Grassley urged Obama to formally designate China as a currency manipulator to prod Beijing into action.

Obama has twice declined to label China as a currency manipulator, but faces a third decision on that issue in April.

Finance ministers and central bank governors of the Group of Seven rich nations will discuss China's currency this weekend in Canada, a US Treasury official said.

Zuo Chuanchang, a researcher with the Academy of Macroeconomic Research, a think-tank under the National Development and Reform Commission, said a row over the yuan would not lead to anything like a trade war.

"It's very normal to see some disputes between China and the United States, but this doesn't mean there will be a bust-up." he said.

Reviled as separatist

China on Wednesday also warned Obama against meeting the Dalai Lama, reviled by Beijing as a separatist for seeking self-rule for Tibet. The meeting may happen as early as this month.

Beijing was already upset with Washington over a USD 6.4 billion U.S. weapons package for Taiwan, the self-ruled island that Beijing deems a breakaway province.

China's foreign ministry spokesman said on Thursday the government's decision to impose unspecified sanctions on US firms selling weapons to Taiwan was an "appropriate" measure, but declined to say what the exact legal basis would be.

A senior US diplomat said the United States "certainly would regret" any Chinese sanctions on US firms, but noted that China hasn't done anything yet.

"We'll be looking at how to address that as the Chinese reaction develops," said David Shear, Deputy Assistant Secretary of State for East Asian and Pacific Affairs.

China has postponed a second round of free trade talks with Taiwan until after this month's Lunar New Year holiday, though Taipei is playing down any political reason for the delay.

The latest flare-up in Sino-US ties comes against a backdrop of disagreements over Internet freedoms in China after search engine Google Inc threatened to pull out over censorship and hacking attacks.