China Shouts Fast, Moves Slowly In Currency War With U.S.

China will play its usual defense against the moves in the U.S. Senate to twist Beijing’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating trade wars while patiently waiting out the start of any actual hostilities, calculating that they will eventually recede.

The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Similar sentiments have been expressed by the central bank and the commerce ministry.

While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.

At the very worst, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure that is anyway likely to abate after next year’s U.S. elections, while buying more time for the economy, particularly the export-manufacturing sector, to adapt.

China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. But they want do it to their timetable, not Washington’s — and they have the playbook to do that.

Beijing Takes Another Step To Internationalize Its Currency

Bank of China’s new if limited yuan trading facility for its U.S. customers is another small step in the direction of internationalizing the currency. It is the first time customers can to buy and sell yuan using accounts at the state-owned bank’s U.S. branches, rather than go through Hong Kong. A limit of 20,000 yuan ($3,000) a day can be bought per individual’s account, the same cap that applies in Hong Kong to limit speculation. Business accounts are uncapped.

Beijing has been pushing its importers and exports to settle trade less in dollars and more in yuan, and allowing the development of an offshore market in the yuan. Cross-border trade settlements in Hong Kong grew from an average of 4 billion yuan a month in the first half of last year to 68 billion yuan in October. China Bank of Construction forecast recently that this number could reach 1.6 trillion yuan a month by 2015. However, the trend is more pronounced in the trade with countries other than the U.S.

Nevertheless, it has helped swell the yuan deposit base in Hong Kong to 260 billion yuan at end-November 2010, and the introduction of markets in the currency and of yuan-denominated financial instruments, including so-called dim sum bonds. Trading in the currency was allowed in Hong Kong last July. Daily trading has now reached $400 million. Given $4 trillion is the total of all daily currency trading, the internationalization of the yuan still has a long way to go, but it is clear where it is headed however cautiously.

The post was first published on China Bystander.

G-20 Seoul Summit Outcome: Someday, One Day, Maybe Never

If there is one thing that can be said about the newly-concluded G-20 summit in Seoul it is that everyone can claim it was a success, without having to do anything immediately about it, and certainly not the same thing. The final communiqué’s wording left open many interpretations of its headline commitments, that the major economies have agreed to refrain from competitive devaluations, that they will get the IMF to come up with indicative guidelines to tackle imbalances, and give emerging economies a bigger say in the IMF.

None of those represent much if any advance from where the G-20’s finance ministers had got earlier this month at their preparatory meeting, but given the gradual drifting apart of the consensus over the coordinated management of the global economy that had formed to deal with the global financial crisis of 2008 and the substantial differences over currencies, trade and quantitative easing going into the meeting (and expressed acrimoniously at times during it, we hear, particularly when Chinese and American officials were in the same room) that was not nothing. But the leaders came up with neither timetables nor hard goals to turn their good intentions, however vague, into actionable policy:  a what, but no when nor how much. (Asking the IMF to look at something next year doesn’t count as a when.)

So on to the APEC summit in Yokohama for many of the G-20 leaders to reprise many of the same economic issues with similar lack of progress. Meanwhile, this Bystander feels, the Seoul Action Plan, for, yes, the G-20’s communiqué lays it out, will be rather like the revaluation of the yuan, all in its own time.