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China to Broaden Debate from Yuan in U.S. Talks

After extending an olive branch to the United States by giving its currency more room to move, China is likely to focus on issues other than the yuan to cement progress in trade talks this week.

Few analysts on either side of the Pacific read Friday's step by the central bank to let the yuan range up or down by 0.5% against the dollar each day -- instead of 0.3% previously -- as a sign that it was ready to let the currency's gradual climb gather much more pace, as U.S. critics demand.

Instead, having made a small gesture on the main sticking point in bilateral economic ties, Vice Premier Wu Yi and the delegation she is leading to Washington will probably try to sell their counterparts -- and Congress -- on the idea that a series of modest moves in other areas can add up to real results.

They will likely aim during the second round of the "strategic economic dialogue" from Tuesday to Thursday to etch out new fields -- like energy and the environment -- where the two can find "win-win" solutions, analysts say.

"There won't be any big breakthroughs on problems like the yuan and market access, but there will definitely be some small improvements," said Shi Yinhong, a professor at the People's University of China in Beijing.

"China will tell the Americans: 'We shouldn't just look at how much progress has been made specifically on old points of contention -- we need to look at all of these little improvements in both new and old areas'."

Much of the frustration in Washington over the big U.S. trade deficit with China -- which hit $233 billion last year -- has focused on the yuan, which many lawmakers say is kept artificially weak, giving Chinese exporters an unfair advantage.

Concern Over Jobs

The currency has appreciated by 5.8% since it was revalued by 2.1% and set free from a dollar peg in July 2005. U.S. Treasury Secretary Henry Paulson has said that is not enough and that he will keep pressing Beijing to do more.

But China has plenty of reasons of its own for standing firm on letting the yuan strengthen only gradually, said Yin Jianfeng, a researcher at the Chinese Academy of Social Sciences, the government's leading think tank.

"There's little chance of making concessions -- not from the economic angle nor the political one," Yin said.

For one, authorities must be careful to avoid mass layoffs in export industries like textiles and light manufacturing that employ millions of mostly rural migrant workers, Yin said.

Further, with a five-yearly Communist Party Congress approaching in the autumn -- at which key posts in the party bureaucracy will be filled -- officials will have an incentive to avoid any bold reforms that could cause economic bumps, he said.

One area where Beijing might hold out a carrot is financial services, where Paulson has been pushing for greater access, said Jiming Ha, chief economist at China International Capital Corp.

While increasing the 25% cap on foreign ownership in banks is probably a longer-term proposition, authorities might be ready to grant ad hoc approval for more joint-venture securities firms within weeks or months, Ha said, despite a general freeze.

Give And Take

Beijing's willingness to move will no doubt depend on whether the U.S. can compromise on issues like curbs on exports of high-tech goods with dual civil-military applications -- a complaint Wu and other officials reiterated last week.

"Everything is on a give-and-take basis. If the U.S. moved unilaterally on some anti-subsidy policies, it could cause the process to backfire," Ha said. As well as the symbolism of widening the yuan's band, analysts pointed to expectations that China will keep tweaking its export tax regime to discourage shipments of some products.

China could also hold out the prospect of cooperation on energy and the environment as lucrative areas for U.S. exporters, said People's University's Shi. The imperative of fostering a cleaner, more energy-efficient economy has become a common theme in speeches by Chinese leaders.

"These are huge areas, and could bring about a lot of exports of U.S. equipment and technology," Shi said. "If the United States is wise enough to transform this into a huge commercial opportunity, that would be great."

Such steps are unlikely to muffle the drumbeat of political pressure for a major change on the yuan, said Sun Zhe, an expert on China-U.S. relations at Fudan University in Shanghai.

But even that would be no cause for alarm, Sun said. "China's already very used to that," he said. "Most Chinese officials are already very used to dealing with America -- so no matter how many demands it makes, we'll basically continue to negotiate with them according to our own way of doing things."

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