China, U.S.: An Economic Consensus
Friday, 18. May 2007, 19:56:32
Strategic Forecasting
May 18, 2007
Summary
China has widened the trading band for the yuan from 0.3 percent to 0.5 percent effective May 21. The increase precedes Vice Premier Wu Yi\'s visit to Washington to meet with U.S. Treasury Secretary Henry Paulson for the annual U.S.-China Strategic Dialogue. Beijing\'s move is part of a series of steps to demonstrate progress on currency and trade issues designed to respond to U.S. pressure on Chinese economic policies. The Chinese, the U.S. administration and even the U.S. Congress agree that while change is needed, China should move methodically rather than drastically alter its economic policies.
Analysis
The People\'s Bank of China announced May 18 that the daily spot market trading band for the yuan against the dollar will widen from 0.3 percent to 0.5 percent beginning May 21. The change comes ahead of Vice Premier Wu Yi\'s visit to Washington for the latest round of the U.S.-China Strategic Dialogue. The widening of the trade band is not entirely unexpected; Premier Wen Jiabao hinted nearly as much back in 2006.
The shift is part of a series of gradual steps by China to alter its economic policies -- a slow process that has the backing and cooperation of the U.S. administration. And even the U.S. Congress, which talks of 27 percent tariffs on Chinese-made goods, in reality has little desire to see a massive and rapid shift in Chinese currency and trade policies, despite the domestic political benefits of keeping the issue front-and-center.
Facing continued pressure from the United States, in 2005 Beijing broke from its fixed yuan peg to the dollar and established a floating peg, with a maximum 0.3 percent daily band. The gradual appreciation of the yuan since then has already moved the yuan past the Hong Kong dollar in relation to the U.S. dollar. (At one time it was thought the yuan would cease its rise when it reached parity with the Hong Kong dollar.) Generally, the increase in the yuan has tracked the rise of other major Asian currencies like the South Korean won and the Singapore dollar over the past two years. The Japanese yen stands in sharp contrast, having lost more than 10 percent of its value compared to the U.S. dollar over the past 24 months, whereas the yuan, won and Singapore dollar have all risen more than 7 percent.
Widening the trading band (which nearly doubles the potential appreciation rate of the yuan) is just one of several steps Beijing is taking ahead of Wu\'s visit to Washington. Chinese officials have announced additional export tariffs on key sectors, including steel; raised reserve requirements for banks (an attempt to slow lending for stock market speculation); and raised interest rates again. Beijing also has launched a number of trade initiatives to increase China\'s imports and refocus investment in China into higher-value-added industries, rather than in low-end manufacturing (which makes up a large portion of China\'s exports).
But even as China makes shifts and adjustments, the government does not want rapid or massive shifts in China\'s economic structure. It appears the U.S. administration agrees. The strategic dialogue, established by then-Deputy Secretary of State Robert Zoellick, is now overseen on the U.S. side by U.S. Treasury Secretary Henry Paulson. It is part of an arrangement between Washington and Beijing gradually to adjust the trade balance, China\'s economic policies and China\'s broader role in international politics. It is an extension of the so-called \"responsible stakeholder\" dialogue floated by Zoellick in 2005, and marks Washington\'s recognition that there is a better chance of managing and shaping Chinese economic and political evolution through cooperation and coercion rather than confrontation.
This also fits with Beijing\'s strategic view of balancing its global relations by focusing first and foremost on its relationship with the United States. China sees the next five years as a crucial time for managing relations with Washington, particularly during the transition from the Bush administration to whatever follows it, whether it be a Republican or Democratic administration. The appointment of former Ambassador to the United States Yang Jiechi as foreign minister reflects this strategic focus in Beijing, as does the creation of the Center for China-U.S. Relations Studies at the Foreign Ministry\'s China Institute of International Studies in December 2006.
The U.S. Congress, however, has been seen as an outlier, as a source of uncontrolled pressure from the United States on China. This has become particularly true with the new Democratic-controlled Congress and its acrimonious relation with the Bush administration. It is from Congress that calls for 27.5 percent tariffs on Chinese goods originate (the bill repeatedly proposed by U.S. Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C.) and in Congress where the trade balance and Chinese economic restrictions are raised quite vociferously. But while Congress likes to talk about China and threaten large-scale economic retaliations against real or perceived unequal trade practices, Congress also is rather slow to actually move on these issues.
China-bashing, particularly on the economic front, is a very popular play in U.S. politics, and members of Congress on both sides of the aisle participate with gusto. But even some of the biggest China-bashers have noted that they have little desire actually to pass their extreme punitive trade bills against Beijing, but rather want to use them to shape Beijing\'s perceptions and its ultimate actions. Things like a 27 percent tariff on all Chinese-manufactured goods might hurt China, but they also would hit U.S. businesses that have invested in and moved manufacturing to China to take advantage of the cost savings. These same businesses also are the financial backers of many Congressional campaigns. And even Congress\' constituents are not necessarily best-served by a massive and rapid shift in the U.S.-Chinese trade patterns, as American consumers have grown quite fond of the low-cost imports.
Despite the noise and heated debates, Wu\'s visit thus will be one of quiet cooperation. Though raising a cry about Chinese trade and currency practices is politically expedient for Congress, even Congress is quietly satisfied with gradual, rather than rapid, change -- something easier to manage on both sides of the Pacific.
May 18, 2007
Summary
China has widened the trading band for the yuan from 0.3 percent to 0.5 percent effective May 21. The increase precedes Vice Premier Wu Yi\'s visit to Washington to meet with U.S. Treasury Secretary Henry Paulson for the annual U.S.-China Strategic Dialogue. Beijing\'s move is part of a series of steps to demonstrate progress on currency and trade issues designed to respond to U.S. pressure on Chinese economic policies. The Chinese, the U.S. administration and even the U.S. Congress agree that while change is needed, China should move methodically rather than drastically alter its economic policies.
Analysis
The People\'s Bank of China announced May 18 that the daily spot market trading band for the yuan against the dollar will widen from 0.3 percent to 0.5 percent beginning May 21. The change comes ahead of Vice Premier Wu Yi\'s visit to Washington for the latest round of the U.S.-China Strategic Dialogue. The widening of the trade band is not entirely unexpected; Premier Wen Jiabao hinted nearly as much back in 2006.
The shift is part of a series of gradual steps by China to alter its economic policies -- a slow process that has the backing and cooperation of the U.S. administration. And even the U.S. Congress, which talks of 27 percent tariffs on Chinese-made goods, in reality has little desire to see a massive and rapid shift in Chinese currency and trade policies, despite the domestic political benefits of keeping the issue front-and-center.
Facing continued pressure from the United States, in 2005 Beijing broke from its fixed yuan peg to the dollar and established a floating peg, with a maximum 0.3 percent daily band. The gradual appreciation of the yuan since then has already moved the yuan past the Hong Kong dollar in relation to the U.S. dollar. (At one time it was thought the yuan would cease its rise when it reached parity with the Hong Kong dollar.) Generally, the increase in the yuan has tracked the rise of other major Asian currencies like the South Korean won and the Singapore dollar over the past two years. The Japanese yen stands in sharp contrast, having lost more than 10 percent of its value compared to the U.S. dollar over the past 24 months, whereas the yuan, won and Singapore dollar have all risen more than 7 percent.
Widening the trading band (which nearly doubles the potential appreciation rate of the yuan) is just one of several steps Beijing is taking ahead of Wu\'s visit to Washington. Chinese officials have announced additional export tariffs on key sectors, including steel; raised reserve requirements for banks (an attempt to slow lending for stock market speculation); and raised interest rates again. Beijing also has launched a number of trade initiatives to increase China\'s imports and refocus investment in China into higher-value-added industries, rather than in low-end manufacturing (which makes up a large portion of China\'s exports).
But even as China makes shifts and adjustments, the government does not want rapid or massive shifts in China\'s economic structure. It appears the U.S. administration agrees. The strategic dialogue, established by then-Deputy Secretary of State Robert Zoellick, is now overseen on the U.S. side by U.S. Treasury Secretary Henry Paulson. It is part of an arrangement between Washington and Beijing gradually to adjust the trade balance, China\'s economic policies and China\'s broader role in international politics. It is an extension of the so-called \"responsible stakeholder\" dialogue floated by Zoellick in 2005, and marks Washington\'s recognition that there is a better chance of managing and shaping Chinese economic and political evolution through cooperation and coercion rather than confrontation.
This also fits with Beijing\'s strategic view of balancing its global relations by focusing first and foremost on its relationship with the United States. China sees the next five years as a crucial time for managing relations with Washington, particularly during the transition from the Bush administration to whatever follows it, whether it be a Republican or Democratic administration. The appointment of former Ambassador to the United States Yang Jiechi as foreign minister reflects this strategic focus in Beijing, as does the creation of the Center for China-U.S. Relations Studies at the Foreign Ministry\'s China Institute of International Studies in December 2006.
The U.S. Congress, however, has been seen as an outlier, as a source of uncontrolled pressure from the United States on China. This has become particularly true with the new Democratic-controlled Congress and its acrimonious relation with the Bush administration. It is from Congress that calls for 27.5 percent tariffs on Chinese goods originate (the bill repeatedly proposed by U.S. Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C.) and in Congress where the trade balance and Chinese economic restrictions are raised quite vociferously. But while Congress likes to talk about China and threaten large-scale economic retaliations against real or perceived unequal trade practices, Congress also is rather slow to actually move on these issues.
China-bashing, particularly on the economic front, is a very popular play in U.S. politics, and members of Congress on both sides of the aisle participate with gusto. But even some of the biggest China-bashers have noted that they have little desire actually to pass their extreme punitive trade bills against Beijing, but rather want to use them to shape Beijing\'s perceptions and its ultimate actions. Things like a 27 percent tariff on all Chinese-manufactured goods might hurt China, but they also would hit U.S. businesses that have invested in and moved manufacturing to China to take advantage of the cost savings. These same businesses also are the financial backers of many Congressional campaigns. And even Congress\' constituents are not necessarily best-served by a massive and rapid shift in the U.S.-Chinese trade patterns, as American consumers have grown quite fond of the low-cost imports.
Despite the noise and heated debates, Wu\'s visit thus will be one of quiet cooperation. Though raising a cry about Chinese trade and currency practices is politically expedient for Congress, even Congress is quietly satisfied with gradual, rather than rapid, change -- something easier to manage on both sides of the Pacific.
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