China: Pressure on yuan 'may backfire'

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China warned on Thursday that obsessing over yuan appreciation would not solve trade problems in the United States and "might make things even worse", while economists view US demands as a political ploy ahead of midterm congressional elections.

"Adding pressure will not resolve trade issues between China and the US the country's exchange rate reform will only be pushed forward in accordance with economic conditions and balance of international payments," Foreign Ministry spokeswoman Jiang Yu said at a media briefing.

Jiang's remarks came in response to earlier comments by US Treasury Secretary Timothy Geithner, who expressed dissatisfaction with the pace of the yuan's appreciation in testimony prepared for congressional hearings on China's currency policy.

The yuan was traded at 6.7181 against the greenback on Thursday, its highest level since June 19, when the central bank announced that it would deepen reform of the mechanism governing the yuan exchange rate to improve its flexibility.

The Chinese currency has gained 1.6 percent against the US dollar since that date. But the US still thinks it is not enough.

"We are concerned that the pace of appreciation has been too slow and the extent of appreciation too limited," Geithner said in remarks to the US Senate Banking Committee on Thursday.

"We are examining the important question of what mix of tools, those available to the US and multilateral approaches, might help encourage the Chinese authorities to move more quickly (on yuan appreciation)," Geithner said.

His remarks came as the Obama administration was under intense pressure to revitalize the flagging economy and cut high unemployment ahead of November's midterm elections.

The jobless rate in the US reached 9.6 percent in August, prompting Obama to unveil a raft of tax cuts and infrastructure projects to spur economic growth.

Economists and bank executives said politics in Washington is playing a role in the issue as blaming the "undervalued" yuan for the US trade deficit with China will divert public attention from the state of the economy and could be politically popular.

"It is simply a political game," said Ding Yifan, deputy head of the Institute of World Development at the State Council's Development Research Center. "The yuan issue is easy to attack as the Democrats fear midterm election losses" if Obama's economic plans failed to match expectations.

In New York, Stephen Roach, non-executive chairman of Morgan Stanley Asia, said that "with the election season in hand, the drumbeat in Congress is getting louder and the Obama administration and the Democratic Party in general are in serious trouble. The rhetoric is led more by politics than by global economics".

"If we think for a moment that we are going to solve this problem by bashing the Chinese we are deluding ourselves," he said in an address to some 200 members of the Council on Foreign Relations on Thursday morning.

Roach, who has testified repeatedly before Congress on the issue, said the main problem for the US is the lack of national savings, which is now at minus 2.5 percent of GDP. "So we need to import more surplus savings from abroad in order to grow. And Congress is clueless, it does not understand this."

Jacob Frenkel, chairman of JP Morgan Chase International, said the issue will not be solved unless the gap in savings between China and the United States is filled.

While acknowledging it was China's choice to make, he advised the US administration to have a more constructive dialogue with the Chinese to develop financial markets. That will transform the debate of exchange-rate rivalry into a constructive, win-win situation for everyone, Frenkel said.

Yu Yongding, economist and former central bank advisor, said that it is essential not to exaggerate the effect of currency appreciation on the balance of trade.

"The exchange rate is just one of many factors which affect trade balances," Yu said.

"It is worth noting that the income effect of global demand is significantly larger than the exchange rate on China's trade balance," Yu said.

Bill Rhodes, senior vice-chairman of Citigroup Inc and Citibank, said blaming the yuan's exchange rate is not reasonable. "There are lots of reasons for the imbalance of trade, such as the rate of savings. Adjusting exchange rates cannot solve all the problems. Just look back at what happened in Japan," Rhodes told China Daily.

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