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Analysis
Beyond the Washington power play, Beijing will have to move towards a new reserve role for the renminbi

Beyond the Washington power play, Beijing will have to move towards a new reserve role for the renminbi

by David Marsh

Mon 12 Apr 2010

Superpowers want to look and be treated like grown-up states, not like deviant schoolboys. So when the high-octane brains clustered around President Barack Obama started to think about how best to exert pressure on Beijing over the renminbi exchange rate, they eventually concluded that declaring that China “manipulated” its currency was hardly the best way of winning a positive outcome.

A policy based on statements hinting at inscrutable Oriental deviousness does seem a trifle lacking in subtlety. So, wisely, the US Treasury will skip its planned 15 April announcement on whether the Chinese are up to something crafty on the currency. Tim Geithner, the Treasury Secretary, followed up the new-found diplomacy with a lightning visit to Beijing to see Chinese Vice Premier Wang Qishan last Thursday.

Heavyweight commentators and various international go-betweens have been trying for some time to make the Americans understand a couple of important points about dealing with the Chinese.

First, the Chinese authorities themselves want to bring about a modest renminbi appreciation in the next few weeks to reduce inflationary pressures – particularly on the property market. Insistent American demands on the renminbi are likely to be counter-productive – since the Chinese (no more than the Americans) don’t like being pushed around by foreigners.

Secondly, a high-level Washington campaign to persuade Beijing to unpeg the renminbi from the dollar risks discomfiting - and even unseating - Zhou Xiaochuan, the People’s Bank of China chairman. No-one in Washington can have an interest in seeing Zhou ousted and replaced by a hardliner close to the Politburo. Zhou is regarded as a friend of the West. He and Japanese central bank governor Masaaki Shirakawa are the only Asians on the board of directors of the Bank for International Settlements, dominated by the Europeans and Americans. In public statements, he has often given the impression in recent weeks of favouring an eventual renminbi revaluation as part of an exit policy from post-crisis stimulus measures.

Such statements are seen by China’s pro-export Beijing political leadership as countering China’s economic interests. According to Beijing rumors, relations between Zhou and the leadership are somewhat fragile. If he continues to indicate an accommodating line on American views, without receiving anything in return, he could soon be looking for another job.

Geithner and Obama now appear to have got the message. Overt anti-Beijing arm-twisting will slacken, in the expectation that, left to themselves, the Chinese will get around to doing the right thing. On the other hand, a small-scale upwards drift of the renminbi will do little by itself to reduce the massive US trade deficit with China or the enormous potentially destabilising overhang of China's $2.4tn in currency reserves.

To resolve these problems over the longer term, the Chinese themselves will have to take action to reduce reliance on the dollar as the world’s No. 1 currency and promote international use of the renminbi. Chinese companies are being encouraged to persuade their foreign export customers to switch to renminbi invoicing instead of dollars. Use of the renminbi as a transaction currency in international bond issuance is being expanded. And regional as well as Western central banks will be given the means to build up stocks of the Chinese currency as reserves.

None of this means that the dollar will be replaced any time soon by a new Asian upstart. But the international markets need an alternative to the dollar and the euro. Slowly but surely, their country’s own interests and those of the outside world are pushing the Chinese to take on a more active reserve currency role.

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