Even as China’s leaders appear to have reached a consensus that the nation’s currency policy must change, the timing of any shift has been complicated by surging nationalism, a media frenzy in China over the issue and visits by top officials on each side to Beijing and Washington in recent days.
China has spent several trillion renminbi over the past 21 months to prevent its currency from rising against the U.S. dollar. American lawmakers have become increasingly critical of the policy, complaining that it keeps Chinese exports artificially cheap.
The Chinese news media, which have far more freedom to report on economic issues than political ones, have framed the currency issue mainly in terms of protecting Chinese sovereignty. That has prompted a series of assurances by Chinese officials over the past four days that China will not be pushed by foreign pressure into doing anything against its own interests.
President Hu Jintao told President Barack Obama in Washington on Monday that China would set its currency policy according to its own social and economic development needs, according to Xinhua, the official China news agency.
Xinhua, the People’s Daily newspaper and Chinese state television all gave prominent coverage to what they described as an assurance by Mr. Obama to Mr. Hu that the United States respected Chinese sovereignty regarding the currency. White House officials confirmed that the two leaders had talked about the currency but provided few details.
Mr. Hu’s visit to Washington followed a brief trip by the U.S. Treasury secretary, Timothy Geithner, to Beijing last week, which drew considerable attention to the currency issue even though he tried to keep a low profile. Mr. Geithner flew into the airport, met with Vice Premier Wang Qishan at the airport VIP lounge and quickly left without making any public statements.
U.S. officials have been concerned that public opinion in China against revaluing the currency may make it harder for the government to act. Robert Hormats, the U.S. undersecretary of state for economic, energy and agricultural affairs, said during a visit to China over the weekend that a flurry of public discussion about the renminbi late last week had proved “counterproductive.”
Over the weekend, blogs in China lit up over the issue. One writer, who identified himself as Xiang Songzuo, said Saturday that the American motive in seeking revaluation was “to create an economic bubble and financial crisis in China and to attack the progress China has made toward industrialization, urbanization and modernization.”
Although allowing the renminbi to appreciate would make Chinese-made goods more expensive overseas, many economists, both in China and in the West, say revaluation would be in China’s interest. Appreciation of the currency would help control inflation, limit China’s need to purchase low-yielding U.S. Treasury bonds and free China to raise interest rates to halt an emerging real estate bubble.
Investment bank economists are generally skeptical that China will change its currency policy before June, and possibly not until even later. People close to Chinese policy makers say that officials would prefer to do it much sooner, but that it became impossible to act in the days before Mr. Hu’s visit to Washington, as the issue suddenly drew broad public attention.
Mr. Hu’s trip to Washington for a nuclear security summit meeting has made any immediate policy shift more difficult, added these people, who asked not to be identified by name because of the financial and diplomatic sensitivity of the issue.
An official close to Chinese currency policy makers said that Mr. Geithner’s visit had also made it harder to handle the issue quietly.
Several people close to Chinese policy makers said that the matter had been made complicated by an article last week in The New York Times, of which the International Herald Tribune is the global edition. That article stirred news media interest by reporting that Chinese officials were very close to announcing a shift in currency policy and might even act before Mr. Hu’s Washington visit if no glitch emerged.
Deficits and domestic politics
The problem for Chinese officials is that the sovereignty issue re-emerged just as they had finally reached consensus that it was in China’s economic interest to make the exchange rate more flexible and allow the renminbi to appreciate gradually against the dollar, people with knowledge of the Chinese policy development said.
The course of the Chinese policy debate can be tracked in public comments by Commerce Ministry officials.
Through the National People’s Congress in Beijing in mid-March and in the following weeks, senior Commerce Ministry officials had led a chorus of criticism of the United States and vowed steadfast resistance to any change in the value of the renminbi. The Commerce Ministry is very closely aligned with exporters, even measuring its success by how quickly exports increase.
On March 21, Commerce Minister Chen Deming warned that China would post a trade deficit for the month, its first in nearly six years, and said that pressuring China to change its currency policy was “irrational” in light of the trade gap.
China’s vice commerce minister, Zhong Shan, visited Washington three days later and said that appreciation of the renminbi was “not a good recipe for solving problems.” The ministry even distributed to journalists the cellphone numbers of Chinese academic experts on trade and currency policy, in an attempt to influence public opinion in China and abroad.
But the Commerce Ministry did an about-face at the end of last week. Shortly before the customs agency disclosed Saturday that China did indeed run a $7.2 billion deficit in March, Mr. Chen declared that the deficit was “only a blip on the radar and will in no way hamper the country’s strong economic growth.” He added that China would resume trade surpluses in the months ahead.
Zhou Xiaochuan, the governor of China’s central bank, also seemed to lend support to the idea of a stronger currency when he said over the weekend that fighting inflation was the central bank’s top priority. A weak currency tends to fan inflation, by making imported goods more expensive.