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The Yuan and The Dollar: Obama and Chinese President to Discuss Currency Concerns

"More longer-term, China would like to see the renminbi rival the U.S. dollar's status as a global reserve currency. But this is going to take a long time," Leather says. "China's current and capital accounts need to be fully convertible before that can happen. That's no where near the case at the moment, and it's going to be a while before the renminbi even starts to challenge the U.S. dollar for that status."

Chinese President Hu Jintao has made it clear during the past week what analysts have suspected for months. Beijing wants the yuan to become a competitor with the U.S. dollar as an international currency.

Those aspirations emerged in a rare interview given by Hu to "The Wall Street Journal" and "The Washington Post" ahead of White House talks on January 19 with U.S. President Barack Obama.

Highlighting moves by Beijing to turn the yuan (or renminbi, as the currency is officially known in financial circles) into a global currency, Hu said the world's present dollar-denominated currency system is a "product of the past."

But Mark Williams, a senior economist on China at Capital Economics in London, says China has a long way to go before the yuan rivals the dollar.

"Although China in the long run wants to move more towards having the renminbi used more outside of China, the process will be extremely slow," Williams says. "This is not something that is going to change rapidly over the next two or three years. This is a long-term development that China is pushing through, and it's not something that we're going to see major steps forward on this week, for example, when President Hu is in the U.S.

"But we will see it over the next couple of years. I think there will be a steady stream of policy moves by China toward making the renminbi used offshore more."

Financial analysts note that China recently has made incremental steps toward extending the global reach of its currency.

Until about 18 months ago, the yuan could not be used at all outside of China. But now people in Hong Kong are allowed to have yuan bank accounts. A few banks in the United States and Europe also allow yuan bank accounts.

Trade in and out of China can now be conducted in the Chinese currency, whereas previously it was conducted primarily in U.S. dollars. Beijing last year began allowing foreign companies to issue debt denominated in yuan.

But the volume of trade in yuan and the amount of Chinese currency in bank accounts outside of China is still relatively small.

'It's Going To Be Awhile'

Gareth Leather, a China analyst at the London-based Economist Intelligence Unit, says the yuan must be fully convertible before it can go head-to-head against the dollar.

"More longer-term, China would like to see the renminbi rival the U.S. dollar's status as a global reserve currency. But this is going to take a long time," Leather says. "China's current and capital accounts need to be fully convertible before that can happen. That's no where near the case at the moment, and it's going to be a while before the renminbi even starts to challenge the U.S. dollar for that status."

Washington and China blame each other's monetary policies for causing problems with international trade and the global economy.

Washington says Beijing keeps the value of its yuan artificially low, giving Chinese exporters an unfair advantage by making the cost of their products cheaper in terms of the U.S. dollar. White House spokesman Robert Gibbs says there are many countries that think China must do more to revalue its currency.

"We believe more must be done in terms of their currency. Obviously with inflation, there are some impacts on the real value of their currency," Gibbs says. "But they have taken some limited steps, despite the answers, to revalue their currency."

Chinese officials complain that U.S. Federal Reserve's efforts to stimulate growth through massive bond purchases are fueling inflation in the world's emerging economies.

Chinese Foreign Ministry spokesman Hong Lei said Washington should not blame the yuan for the U.S. trade deficit with China. And he expressed concern about demands from U.S. senators for tough action against China if Beijing continued to manage its exchange rate instead of allowing the yuan to rise in value against the dollar.

"We hope that the U.S. lawmakers involved clearly understand the importance of Sino-U.S. relations," Hong said, "and boost the healthy and stable development of economic and trade ties between the two countries rather than harming the overall situation of bilateral relations."

Goals In Conflict

Williams notes that there is an inherent conflict between the way China now keeps tight control over the value of the yuan and its long-term goal of a currency that is used more widely throughout the world.

"China has a couple of goals," Williams says. "One of them is this idea of getting people outside of China using the renminbi. But the other one, which is a long-standing policy, is of controlling the rate at which the yuan strengthens.

"The renminbi is kept at a relatively low level by Chinese policy makers, and that's a way of ensuring stability in the financial sector in China but also helping China's exporters. Those two goals are somewhat in conflict because the more people outside China there are holding renminbi, the harder it becomes for Chinese policymakers to then control its value."

Leather says he doesn't expect China to drastically change its currency policies in the immediate future beyond, possibly, "some steps that allow a slightly faster appreciation of the renminbi if it has to." He concludes that the most to be expected from today's talks is for the two countries to step back from the possibility of a full-scale trade war.

By. Ron Synovitz

Copyright (c) 2010. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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