Tony Fratto: China Takes a Long View on Currency

Despite fresh rounds of saber-rattling in Washington recently, everyone seems to be sticking to their long-practiced scripts at the U.S.-China Strategic and Economic Dialogue meetings in Beijing.

Chinese President Hu Jintau, in his only comments on the topic when he opened the meetings: "China will continue to steadily push forward reform of the renminbi exchange-rate formation mechanism in a self-initiated, controllable and gradual manner."

And Treasury Secretary Tim Geithner’s response: "We welcome the fact that China's leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda."

Well, it is welcome, but this recognition from China isn’t new.

Flag of the People's Republic of China
Eriko Koga | The Image Bank | Getty Images
Flag of the People's Republic of China

Instead, it’s a clear policy position Chinese leaders have been expressing since 2005 when the country last altered its exchange rate policy, revaluing the yuan and moving from a dollar peg to a reference basket of currencies.

That was one U.S. President and two U.S. Treasury secretaries ago.

China’s leaders, it has to be remembered, have a long view of economic policy. While we in the United States operate on a quarterly financial market calendar and a biannual political calendar, the Chinese continue to doggedly stick to strategies laid out in five-year plans, and they tend to look forward not quarters or years, but decades.

China allowed some flexibility in the yuan from July 2005 until 2008, when the country’s leaders sought stability in the face of global financial stress. In fact, this was the same policy response China’s leaders took in the 1990s during the Asian Financial Crisis, except back then U.S. Treasury officials Larry Summers and Tim Geithner (rightly) encouraged China to maintain a stable currency as other Asian nations engaged in a cycle of devaluations. (Geithner would not have predicted himself dealing with a sticky Chinese currency more than a decade later.)

China will resume its policy of currency flexibility, but no one should it expect it during a period of uncertainty and volatility in global financial markets.

The country’s economic leaders understand that a convertible currency is, ultimately, in China’s best interests.

But Chinese officials will want much greater confidence in the sustainability of growth, with minimal downside risks to the financial system, before re-introducing flexibility.

Given the recent turmoil in Europe and financial markets everywhere, it’s hard to see anyone having that level of confidence before the end of 2010.


Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at