XIANGHE, China — With rising inflation and a potentially overheated economy, China should quicken the rise of its currency to maintain economic stability, U.S. Treasury Secretary Henry Paulson Jr. told Chinese officials on Wednesday.
This story first appeared in the December 13, 2007 issue of WWD. Subscribe Today.
“China’s leaders have voiced concerns about China’s macroeconomic stability, in particular mounting inflation, growing asset bubbles and possible overheating,” Paulson said. “A more flexible exchange rate policy is especially important to China now, given these risks.”
The Chinese yuan has appreciated in value by 9.9 percent since the central bank ended its strict peg to the dollar in 2005 in favor of using a basket of currencies. Still, U.S. officials maintain the yuan is greatly undervalued, giving China, with low production costs, an unfair trade advantage. China repeatedly has said it will revalue the yuan on its own timetable, without disrupting its economic structure.
“The pace of [yuan] appreciation remains one of the key levers to deal with China’s external and internal imbalances,” Paulson said.
The Treasury secretary spoke at the opening of top-level meetings at a resort conference center here, east of Beijing, that are part of the Sino-U.S. “strategic economic dialogue.” The two days of talks include several U.S. Cabinet officials and their Chinese counterparts discussing issues from food and product safety to currency and the environment. Officials stressed that these are not negotiations, but the meetings are intended to curb trade tensions and to reach new agreements in several areas.
Paulson’s remarks about the yuan came a day after the Chinese government released statistics showing another record month of rising inflation. The consumer price index jumped 6.9 percent in November compared with the same month last year, marking an 11-year high and underlining the country’s worries about increasing prices. The pace is far above the 3 percent maximum the government believes China can bear without threats to its social stability, and the highest price increases are coming in tense rural areas.
The same report showed a soaring trade surplus for China that reached $26.3 billion in November, the third-highest monthly level on record. The surplus continues to grow despite some increases in China’s imports, according to the National Bureau of Statistics.
Paulson’s counterpart at the meetings, Chinese Vice Premier Wu Yi, said there is a “shared desire to resolve difficulties and problems that have occurred in the course of rapid growth of bilateral business ties.”
Wu did not address China’s inflation or the pressure to allow the currency to appreciate, but instead warned against trade sanctions by the U.S. against China. She said there are about 50 “protectionist China-related bills” before Congress.
“Obviously, to resort to trade protectionism and blame another country for the structural problems in the U.S. economy is the wrong approach, which would only harm the interests of the United States itself,” Wu said.
“Trade protectionism will harm the interests of both sides,” Finance Minister Xie Xuren told reporters.
As the U.S. considers legislation, officials said China is showing some reluctance in opening its markets to international competition. And Paulson said there is a growing sentiment in the U.S. and China toward trade protectionism.
“We must resist attempts to reduce transparency or increase regulatory obstacles in order to protect domestic industries,” he said. “Taking short-term, politically expedient actions will almost certainly impede our long-term prosperity and ability to address long-term strategic issues.”
Wu promised that China will “greatly expand its domestic consumption,” opening new markets to U.S.-made goods and services. She said the central government plans to make this an energy-efficient and environmentally sound country with a solid economic base.
At separate trade talks under the U.S.-China Joint Commission on Commerce & Trade, the two countries this week signed 14 new agreements involving a range of issues, including food and product safety. The pacts establish measurable guidelines and deadlines for improving safety checks of products exported to the U.S. from China. Exports will be required to register with Chinese authorities, who will then provide more detailed information to customs officials in the U.S. Mass product recalls and safety concerns have made the safety of goods manufactured in China a top concern this holiday season for American consumers. Paulson said the issue is vitally important to bilateral trade.
The earlier discussions sounded a somewhat acrimonious note about product safety, Wu told reporters. She said the meetings were delayed by a heated discussion. Later, Wu said the two sides could work together to overcome their differences.
Other agreements include a provision for more Chinese tourist visas from the U.S. and promises from China to open more of its markets, including telecommunications and agriculture, to U.S. goods and services. The economic dialogue concludes today.