/ 13 December 2007

US says China recognises need for stronger yuan

United States Treasury Secretary Henry Paulson came away from two days of talks on Thursday convinced that China sees the need for a stronger yuan. Although the grand-sounding ''strategic economic dialogue'' apparently produced slim pickings, Paulson said it provided a sound foundation on which to expand cooperation.

United States Treasury Secretary Henry Paulson came away from two days of talks on Thursday convinced that China sees the need for a stronger yuan and with a promise that Beijing will open its financial markets a bit wider.

Although the grand-sounding ”strategic economic dialogue” apparently produced slim pickings, Paulson said it provided a sound foundation on which to expand cooperation between two nations whose ties he deems vital to global economic prosperity.

The exchange rate was a major focus of the meetings because, as Paulson put it, the pace of the yuan’s rise had effectively become a proxy for China’s willingness to permit market forces to play a greater role in its economic development.

Paulson did not seek specific commitments from Beijing on the yuan, but he said Chinese policy makers now knew that a stronger exchange rate would help them to fight inflation.

”The Chinese recognise growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilise their economy,” Paulson said at a closing news conference.

China’s central bank, which keeps the currency on a tight leash, let the yuan rise on Thursday to its highest level since it was revalued and depegged from the dollar in July 2005. The bank is battling inflation of 6,9%, an 11-year high.

The yuan has climbed about 6% against the dollar in the past year, but some US lawmakers say it remains grossly undervalued and are preparing legislation to force China’s hand.

Paulson declined to say how much more quickly Beijing needs to let the currency climb. ”The pace of appreciation has increased over the past year,” he said. ”I’ve talked to the Chinese enough that we’ve agreed we don’t talk about how fast is fast. We agree with the principle [of appreciation]”.

The Treasury chief cited some specific gains from the meeting, including a Chinese commitment to let banks and other foreign companies that do business in China issue yuan-denominated debt and equity securities.

”I would also note we have made modest progress in the financial services area, expanding opportunities for global financial services companies to do business in China,” he said.

Paulson said Beijing would end a two-year freeze on foreign securities joint ventures in China, an especially sensitive issue for the influential US financial services industry, and expressed confidence that the permitted business scope of such ventures would be expanded.

”We want them to do more and to move faster,” he said.

”Opening China’s financial markets to foreign competition strengthens the financial backbone of the Chinese economy, and is critical to China’s goals of spreading the benefits of growth to all the Chinese people,” Paulson said.

But it was evident that US negotiators did not get all they sought.

Throughout the talks, officials led by Vice-Premier Wu Yi made sure their views were heard and sometimes pushed back against US calls for China to speed up economic reforms.

Beijing declined to lift foreign-ownership caps in Chinese banks and brokerages and left US officials fuming over an apparent ban on US-made movies, which Trade Representative Susan Schwab called ”a very serious matter”.

Commerce Secretary Carlos Gutierrez said the United States was still trying to get clarification from China about the ban and to have it lifted. ”We are all over it,” he said.

Chinese officials went into less detail about the meeting.

Wu said the two sides had achieved satisfactory results and had gone beyond burning trade and economic issues of the day.

The next instalment of the dialogue would take place in Washington in June, she said. – Reuters