U.S Step up Pressure on China

WASHINGTON—The U.S. will try to intensify pressure further on China over its exchange-rate policy after a weekend meeting of the International Monetary Fund failed to produce an agreement on international currency movements.

Reuters

IMF Managing Director Dominique Strauss-Kahn and China's Vice Finance Minister Zhu Guangyao in Washington.

A U.S. official said the Obama administration was pleased that it was able to put China's currency policies at the center of discussions at the IMF's annual meeting, and felt that Beijing was responding to U.S. efforts by lifting the value of the yuan at an accelerated pace over the past month. But the official said continued pressure was needed to prevent China from backsliding.
The U.S., European nations and a number of emerging markets complain that China is deliberately undervaluing its yuan to aid its exporters. To compete, Japan, South Korea, Brazil and others have taken measures to beat down the value of their currencies as well, leading to fears these efforts may presage a trade war.

Youssef Boutros-Ghali, Minister of Finance of Egypt and Dominique Strauss-Kahn, IMF Managing Director, spoke at a press briefing by the IMF's Board of Governors during the IMF's meeting in Washington, DC.

Chinese officials took a much more visible role at the IMF meetings than they usually do, making their case in press conferences, speeches and public seminars. They sought to ease tensions, but were careful not to go beyond Beijing's policy that a "gradual" ascent in the yuan was to be expected—though they didn't define gradual.
On Sunday, China's central bank governor, Zhou Xiaochuan said if China can keep inflation low and the economy stable, "then the currency would become stronger and stronger." But he warned not to expect immediate changes, comparing the policy to a Chinese doctor putting together a package of 10 herbs to cure an illness.
"It solves the problem not overnight, but in a month or two months," he said to laughs at a meeting of the Institute of International Finance, a bankers' trade association.

Asia Braces for Currency Wars

The U.S will focus its attention on a summit of the leaders of the Group-of-20 industrialized and developing nations in Seoul in November. The Obama administration is betting China will make a further move on its currency before then, as a way to keep its exchange-rate policies from dominating the meeting—and South Korean negotiators are scrambling to convince Beijing to do just that.
Shortly before the last G-20 summit in Toronto in June, Beijing agreed to show "flexibility" in its exchange-rate policy, ending a two-year period of tightly tying the yuan to the dollar.
However, China barely budged its currency upward, producing yet another round of U.S. pressure, including a Sept. 6 visit to Beijing by White House economic adviser Lawrence Summers. Since then, the value of the yuan has gained about 2% against the dollar, a pace the U.S. official said was encouraging, though the U.S. wants further movement.

Reuters

World Bank President Robert Zoellick, left, and IMF Managing Director Dominique Strauss-Kahn in Washington Saturday

"It is critical to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate management," U.S. Treasury Secretary Timothy Geithner said at an IMF session Saturday, in remarks clearly aimed at China.
The U.S. has other levers too, but it is wary of pushing some of them. Most prominent is a semiannual report that Treasury is required to release by Friday examining whether exchange rates—including China's—are being "manipulated." Mr. Geithner has testified in Congress that a manipulation finding on China's yuan could be counterproductive. Such a finding, under a 1988 trade law, simply requires the U.S. to negotiate with Beijing, which it already is doing, and could open U.S. companies to retaliation from Beijing.
In April, Treasury delayed the report, giving China more time to change its policy, and then gave China a passing grade after it said it would allow more flexibility.

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International Monetary and Financial Committee Chair Youssef Boutros-Ghali, Finance Minister of Egypt, at a press briefing in Washington Saturday.

Still, giving China a pass in the upcoming report could cause political problems for the administration at a time when China has become a potent political issue in fall campaigns. That argues for Treasury delaying the release of its finding, as it has done in the past under Democratic and Republican administrations. Mr. Geithner has told lawmakers he'll file in a "timely" manner, without a more specific commitment.

Officials from the International Monetary Fund expressed the need for cooperation between nations and discussed protectionist economic policies at their annual meeting in Washington. WSJ's Jason Bellini reports.

Two proposals the U.S. took into the IMF meeting got no traction. In a talk in advance of the meeting, Mr. Geithner suggested that China might be willing to boost its currency if other Asian currencies did the same, in a kind of regional accord. That way, none of the countries would gain a competitive edge. But during a seminar at the IMF, Yi Gang, deputy governor of China's central bank, called such a deal "very unlikely."
Mr. Geithner also said that China's power and role at the IMF should be linked to its willingness to move its currency. That won the backing of IMF Managing Director Dominique Strauss-Kahn, but few others. "Nobody is linking this," said Egyptian Finance Minister Youssef Boutros-Ghali, who chairs the IMF's policymaking committee and is overseeing a revamping of the organization's voting structure.
While European nations expressed concern about the yuan's value, they were less confrontational with Beijing. Some argued it's up to the U.S. and China to address the root causes of the dispute over currencies.
"The U.S. would have to reduce the internal and external deficits that they have. From the Chinese side, the most important aspect would be to increase internal consumption, and an appreciation [of their currency rate] would be one of the instruments," Ewald Nowotny, head of Austria's central bank, said in an interview.
Olli Rehn, the European Commission's head of economic and monetary affairs, said he considered the yuan "significantly undervalued" and called on the IMF to take an "enhanced role" in solving the dispute.
Mr. Strauss-Kahn on Friday suggested an initiative in which the IMF would work on a number of fronts to ease currency battles. But by the end of the IMF meeting on Saturday, he described a narrower effort where the IMF would focus its reviews of country policies more heavily on currency issues. The U.S. official said the IMF should continue to play an advisory role to the G-20.
That leaves the U.S. with a combination of unilateral and multilateral levers to pull. Unilateral moves can be difficult because of domestic politics. Mr. Geithner and the White House have tried to use Congressional ire to convince China of the depth of U.S. concern. They point to a bill that passed the House last month that would make easier for domestic industries to win cases against China based on the argument that Beijing's restraint of its currency subsidizes its exports.
But the Treasury also worries that such a bill could backfire by provoking a trade war. So it hasn't endorsed the bill—or given lawmakers advice about what kind of provisions it wants.

Senate leaders say they don't think there is time to pass a similar bill and have it signed into law during a lame-duck session after the November elections. But that could change if anti-Chinese sentiment grows in the Congress. Senior Republican and Democratic Senate aides think a bill would pass by a wide, bipartisan margin.
The Treasury sees the Korea G-20 summit as more promising. Currency is on the agenda as part of what the G-20 calls its "rebalancing" process. Trade-surplus countries—especially China—have agreed to shift away from export-led growth to domestic consumption, which implies an appreciation of the yuan. Trade deficit countries—especially the U.S.—have agreed to boost savings and reduce imports. The overall goal is reduced reliance on U.S. consumer spending for global growth.
South Korean negotiators are talking to Beijing about the importance of striking a political deal with the U.S. over currency issues before the summit, where President Barack Obama is sure to press Chinese President Hu Jintao. Mr. Zhou, the central banker, said China agrees with the G-20 agenda.
Michael Spence, a Nobel Prize-winning economist now at New York University, on Sunday said Chinese and global interests coincide, rather than conflict. "We are into questions of speed. In my judgment [Chinese officials] are going too slowly....many of them don't get it."