Showdown With China Over Renminbi

While the Euro-Zone fire spreads, the situation regarding the exchange rate between the Remnimbi and the U.S. Dollar is now escalating. 

Yesterday, U.S. Treasury Secretary Timothy F. Geithner flew to China for a previously unscheduled meeting with Chinese Vice Premier Wang Qishan in Beijing.   This meeting triggered speculation that the Renminbi's 21-month-old peg to the dollar may be abandoned.  Geithner last week postponed an April 15 deadline for a U.S. review of currency policies amid pressure from Congress to brand China a "currency manipulator".

At center stage is the issue of fair trade.  China’s trade surplus with the U.S. last year rose to $226.8 billion, more than the combined deficit the U.S. had with its next nine biggest trading partners, according to Commerce Department data.

Senators, including New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham, blame the currency peg for much of the imbalance.  The peg keeps the currency undervalued, aiding Chinese exporters and discriminating against foreign competitors, according to economists.

China introduced rules last year that restrict government purchases to technology products developed in China, the leading complaint of companies such as Microsoft Corp. and Intel Corp.

Fortunately, there are signs that China has become receptive.  Beijing has begun to prepare publicly for a shift in its exchange rate policy.

Tim Geithner told India’s NTV in New Delhi on Tuseday that it was “China’s choice” whether to revalue the renminbi and he was confident Beijing would see a more flexible currency was in its own interest.

The Chinese foreign ministry said China would adhere to three principles on currency policy: any change must be controlled, it must be Beijing’s own initiative and any shift must be gradual.

A senior government economist told reporters in Beijing on Tuesday that China could widen the daily trading band for the renminbi and allow it to resume the gradual appreciation it halted in July 2008 in response to the global credit crisis,

Reports suggest that Treasury officials are optimistic that the Chinese will relax their position, even though yesterday's meeting did not result in any official announcement about the renminbi.

In the delicate negotiations, nothing is certain even if all signs point to a positive policy change in the very near future.  The alternative to a relaxation in the pegged status of the Renminbi, would be a variety of economic reprisals possibly leading to a trade war.  Trade restrictions didn't work during the Great Depression and they would be equally disastrous now.

Marko's Take

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