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Analysis
Washington adrift from Beijing as renminbi stand-off hardens over "manipulator" claim

Washington adrift from Beijing as renminbi stand-off hardens over "manipulator" claim

by David Marsh

Tue 30 Mar 2010

China seems highly unlikely to take early action to change the currency peg that ties the renminbi to the dollar. The People’s Bank, which is fairly low down in the Beijing political-economic hierarchy, has been criticised by some Chinese policy-makers as appearing too soft in the face of continued American sniping against the renminbi peg.

In the general swapping of complaints between China and the US over Beijing’s policies on the renminbi, there are plenty of signs that both sides are digging in. Zhong Shan, the deputy Chinese commerce minister, heated the debate further last week when he said during a visit to Washington that American pressure for a stronger renminbi was “unacceptable.”

All this increases the pressure ahead of the planned US Treasury statement on April 15 that may denounce China as a currency “manipulator” – an outcome that would raise further Congressional pressure on the administration to impose punitive tariffs on many Chinese goods.

Numerous statements by People’s Bank of China Governor Zhou Xiaochuan on the prospects eventually for a shift in the renminbi policy, although meant to calm down foreign exchange markets, have frequently been counterproductive.

The hard-nosed political supremos on the Chinese State Council are likely to have little truck with technocratic central banking arguments that freeing the renminbi would increase China’s ability to control inflation. Instead, they see it as far more propitious that China maintains a policy designed to help exporters – particular since the Chinese currency has been fairly strong lately on a trade-weighted basis owing to the weakness of the euro.

Eventually, China will undoubtedly move to a more flexible policy for the renminbi exchange rate that will allow the Chinese monetary authorities to enjoy greater autonomy over monetary policy at home. But this will be at a time of China’s own choosing, rather than in a manner and on a timetable set by foreign politicians.

In the meantime, Chinese officials make clear that Beijing will do its best to rely increasingly on its own resources in the international monetary stakes. There are practical measures under way to lower the undue international dominance of the dollar. None of these steps is particularly significant by itself, but – taken together – they add up to a genuine move towards a multi-currency reserve asset system, but in a way that does not inflame the US nor expose China to further losses on its gigantic stocks of US Treasury securities.

China has started an initiative to encourage central banks in Asia and further afield to hold renminbi in their foreign exchange reserves. The authorities are encouraging greater use of the currency in borrowing operations by international organisations and companies – one way of stemming upward pressure on the currency.

Use of the renminbi in payment for internationally-traded raw materials is being stepped up. This means that over time China would accept its own currency in payment for exports. If such a trend gained ground, the vast foreign exchange reserve build-up that has plagued domestic monetary polices as well as Sino-American relations would automatically tail off.

All these measures are however piecemeal steps that will have little impact in the short term. For the time being, the Chinese leadership sees no need to articulate a comprehensive policy on how to internationalise the renminbi and thus dampen Washington-Beijing monetary policy divisions. Until this basic condition changes, and since neither side seems in the mood to back down, the currency stand-off looks likely to continue.

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