Yuan v/s US dollars

I picked up the following article from the South China Morning Post today. Whilst I can easily understand the rationale  of the US in pushing for raising the parity of the Yuan to the dollar, which will make exported Chinese Goods more expensive in the US and at the same time re-establishing the balance of trade flow. On the overhand I am asking myself what would become in Yuan value of the deposits the Chinese hold in US dollars placed in US. Do the Chinese write off the value from their books?

I am reminded of a story many years back when I was in Taiwan, and when it was officially announced that the Taiwanese dollars in agreement with the governments concerned will be appreciated to reach a level of 20% higher than the US dollar parity of the day within a rather short period of a few months. It was a fabulous piece of news for smart speculators. They all rushed in to buy Taiwanese dollars and within a short period made millions.

Even today, if the Chinese government is thinking to appreciate the Yuan, it would be wrong for them to admit it. So it is better to stay silent of this issue. Politically it may not suit President Obama’s agenda: more imports from China translate in fewer jobs in the US. More trade surpluses of China do not mean more purchase of US bonds by the Chinese!

It is a tough nut to crack. Market Economy v/s Controlled or ‘reined in’ Economy

Wen seeks to reassure Obama on trade

Reuters in Beijing

Updated on Nov 18, 2009

Premier Wen Jiabao told President Barack Obama his nation does not seek a trade surplus with the United States and wants to balance flows, striking a conciliatory note but avoiding public comment on currency rifts.

Wen made the comments on Wednesday during a meeting with the US President, according to a report on the Chinese Foreign Ministry website.

“China does not pursue a trade surplus,” Wen said, adding that his government wants “to encourage a steady balancing of bilateral trade.”

“Lively global trade and investment will help to overcome the international financial crisis and accelerate global economic recovery,” said the Chinese Premier, also urging both countries to “together oppose trade and investment protectionism.”

Wen’s comments are unlikely to mollify US industry groups and politicians who say Beijing is holding its yuan currency so low against the dollar that it is stoking a US trade deficit with China and worsening global economic imbalances.

But Wen’s reassuring language, as well as praise for Obama in Chinese state media, set a guardedly upbeat tone at the end of a four-day visit that exposed rifts over trade and currency policy.

“The West’s perception of China has been changing gradually, and a positive turn has occurred as Obama has said more than once during his ongoing Asia tour that the United States would not seek to contain China’s rise but welcome China as a strong and prosperous player in the community of nations,” said a commentary issued by Xinhua news agency.

Obama’s words “forged a good starting point to further Chinese-US ties”, it said.

After the talks with Wen, Obama visited the Great Wall, for Chinese people a proud symbol of their heritage.

But the absence of any comment on the yuan in Wen’s published comments was a telling reminder of the rifts remaining as Obama prepared to head for South Korea on Wednesday evening.

The report said that Obama did raise reform of China’s exchange rate policies.

At a summit on Tuesday, Obama made plain to President Hu Jintao that he wants movement on China’s currency policy. Hu also avoided mentioning currencies in comments to reporters.

China has had a huge trade surplus with the United States, and is also the largest foreign holder of US government bonds.

The US trade deficit with China widened 9.2 per cent in September to $22.1 billion, the highest since November last year, according to US data released last week.

“A stable, co-operative, forward-looking China-US relationship will benefit our two countries and all the world,” Wen told Obama.

Despite the bright rhetoric, officials and experts from both sides have stressed Obama’s visit will not bring about immediate policy shifts, or end friction over the yuan, US anti-dumping rules, and Washington’s criticism of China’s controls on citizens’ rights and policies in Tibet.

Such summits are about setting priorities for future dealings, not making immediate policy changes, said Jin Canrong, an expert on China-US ties at Renmin University in Beijing.

The issue of currencies has drawn testy comments from US and Chinese officials. China’s Commerce Ministry on Monday rebuffed calls for the yuan to appreciate, signalling resistance to change foreign exchange policy.

Outside pressure has been building on Beijing to let the yuan rise after more than a year of it being nearly frozen in place against the weakening dollar, with the latest appeal voiced by the head of the International Monetary Fund on Tuesday.

But Chinese officials have swatted down speculation of any big moves soon, and the government appears likely to keep the currency on a tight rein at least until the middle of next year to cement the country’s economic recovery.

“Any policy changes by China, including on the exchange rate, will be based on its assessment of its own interests, not on external pressure,” said Jin, the professor.

Wen has voiced his own worries about the US economy.

In March, he took Washington to task over its fiscal policies, saying he was worried about the health of China’s vast US assets, and repeated those worries at a summit in Africa this month.

China has amassed US$2.27 trillion of foreign exchange reserves, the world’s largest stockpile, and analysts think about two-thirds of this is invested in dollar-denominated assets.

The Xinhua commentary said the United States, and not only China, needed to absorb some lessons and “figure out effective new ways to tackle its own chronic problems”.

It also warned that US mid-term congressional elections next year might encourage “more finger-pointing and protectionism” aimed at China.

Obama and Hu have said that strains over trade and US criticism of China’s human rights restrictions should not overshadow co-operation.

Bonnie Glaser, an expert on China at the Centre for Strategic and International Studies in Washington, DC, said the statement issued by Obama and Hu underscored “the two countries have a lot of common interests, but it remains to be seen whether they can co-operate to advance them”.