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Hu-Bush smiles may turn to snarls on Sino-US trade

Written by: Staff

Beijing, Apr 14: Warm words when Presidents Hu Jintao and George W. Bush meet on Thursday will not head off the risk of serious economic strains if China's trade surplus with the United States keeps ballooning.

Beijing has tried to pave the way for a smooth visit by rolling out the red carpet for two senators critical of its currency and market-access policies; splashing out billion on a cross-country U.S. spending spree; and giving a solemn promise to crack down on counterfeiting and intellectual piracy.

''They'll be keeping back one or two things. But given that Hu doesn't want to be walking into a hostile Washington, the incentive has been to bring forward a lot of good news,'' said economist Stephen Green with Standard Chartered Bank in Shanghai.

The problem, critics say, is that the steps are unequal to the task of curbing China's trade surplus, which tripled last year to 2 billion and jumped 41 percent in the first quarter compared with a year earlier.

Driven by super-competitive exporters, the surging surplus helped boost China's foreign exchange reserves in March to a world-beating 5.1 billion, the central bank said on Friday.

With U.S. Congressional elections due in November, China thus risks becoming a whipping boy for worries about job insecurity spawned by globalisation, just as it has in Italy and France.

''The large trade surplus supports the view that the renminbi is significantly undervalued, and will add to the political and economic pressure on China for exchange rate reform,'' Merrill Lynch's chief Asia economist, TJ Bond, said in a note to clients.

China went further on Friday to show its commitment to a market-driven exchange rate -- a principal demand of Washington's -- by relaxing capital controls to make it easier for individuals and companies to buy foreign currencies and invest abroad.

Protectionist threat

The central bank, which keeps the yuan on a tight leash, might pull another rabbit out of the hat and let the currency, also known as the renminbi, break through the psychological barrier of 8 per dollar in time for the Hu-Bush talks.

While promising greater flexibility, Chinese officials tire of repeating that last July's 2.1 percent revaluation was a one-off event and will not be repeated -- despite U.S. criticism that the yuan, which was unhooked from the dollar at the time, has since risen just 1.16 percent to 8.0172 per dollar.

''China simply isn't going to offer Bush major adjustments in exchange rate policies,'' said Guan Anping, a Beijing trade lawyer and former trade official.

''China believes that wouldn't do either country any good,'' he said. ''The United States hasn't considered the repercussions if there is a sudden major revaluation. Both sides would suffer, because inter-dependence is so strong.'' Guan said Hu's prime audience would be Congress, where a number of law-makers are preparing anti-Chinese legislation. ''Till now, China hasn't grasped how powerful Congress can be and how it works.

Persuading Bush isn't the real challenge,'' he said.

But Fred Bergsten, director of the Institute for International Economics in Washington, said frustration over China's trade surplus was growing in the administration as well as in Congress.

Bergsten told a briefing in Washington that he expected the Treasury, once Hu had left, to declare that China is manipulating the yuan, a charge that may eventually lead to sanctions.

He said that the yuan was anywhere from 20 percent to 40 percent undervalued and that the U.S. trade deficit with China, a record 2 billion in 2005, may swell to 0 billion this year.

''The point is -- and we know this from history -- that if currencies remain way out of line, trade protectionism follows.'' Jonathan Anderson, UBS's chief Asian economist, admits he had expected China's trade surplus to be falling by now. He still thinks the surplus will peak in the second half of this year but says life could become more difficult in the meantime both for Chinese policy makers and for the Bush administration.

''We were hoping for U.S. attention to fade over the rest of the year as the size of the 'problem' went away -- but now we could see U.S. political circles focused on China through the autumn,'' Anderson said in a report this week.


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