From Overseas Press

China, US look to close world's biggest trade gap

(Agencies)
Updated: 2010-05-24 10:09

LULL IN YUAN STORM

The Chinese government has made clear that encouraging domestic consumption and cutting reliance on exports -- just what the United States wants it do--are top policy priorities.

But any change will be measured in years, not months. With mid-term elections looming, patience in Washington can quickly wear thin and the yuan remains a flashpoint as the easiest explanation for the trade imbalance.

Geithner postponed a semiannual currency report in April that could have named China a currency manipulator. In the eyes of many, this seemed to be more an ultimatum than an olive branch.

"That left the impression that he had sold Congress on a strategy of giving China until the end of June to resume appreciation," said Nicholas Lardy, a China expert at the Peterson Institute for International Economics.

Many investors and analysts thought Beijing was on course to remove the yuan from its de facto 22-month-old dollar peg, but the European debt crisis has cast doubt on this forecast.

"They cannot at the moment even pretend to be re-pegging away from the dollar to a genuine basket of global currencies because no one wants to be tied to the euro right now," said Derek Scissors of the Heritage Foundation in Washington.

In muting its criticism of the yuan, the Obama administration is, in part, taking the Chinese government at its word.

"External pressure and noise will do nothing but slow the reform process," assistant finance minister Zhu Guangyao said of the yuan exchange rate on Thursday.

In quiet tones, Beijing will also press for reassurance about the safety of the dollar and US government debt. China is the world's largest holder of US Treasuries with $895 billion.

"I think the US side has a very weak hand going into these talks," Lardy said.

But it might just be a lull in the storm.

"If nothing happens by the end of June on revaluation, then I expect pressure from Congress will resume against Geithner again," he said.