Washington: In his visit to Beijing this week, President Barack Obama is expected to tread lightly when pressing China to let its currency rise against the dollar. Doing so would benefit the U.S. economy by making American-made goods cheaper in China, but Obama is reluctant to upset Beijing. China is the No. 1 lender to the U.S. at a time when the latest annual budget deficit hit a record $1.42 trillion. That makes for a lot of Treasurys to be sold. China has expressed concerns that the falling dollar threatens the value of its existing U.S. holdings.
The United States also needs China's help in dealing with foreign policy threats. Those include curbing the nuclear ambitions of North Korea and Iran. There's another reason for a gentler U.S. stance: Analysts believe China already signaled last week that it was preparing to let its currency rise against the dollar. That shift could eventually aid U.S. manufacturers. It might also feed a U.S. economic rebound. But China is also applying some pressure on the U.S. about its currency. On Sunday, China's top bank regulator said the weak dollar and low interest rates were distorting global asset prices and posing an "insurmountable risk to the recovery of the world economy," according to a transcript of a speech he made at a financial forum in Beijing. The regulator, Liu Mingkang, said the declining dollar and low interest rates were encouraging a "massive" U.S. dollar carry trade — the practice of borrowing money at low rates in one currency to invest in assets in another currency that offer a higher return. Analysts say China will likely wait months before tweaking the yuan-dollar exchange rate, which now stands at about 6.8 yuan to the dollar. Beijing doesn't want to appear to be bowing to U.S. pressure. Even then, it will take time for the U.S. to benefit. Mark Zandi, chief economist at Moody's Economy.com, says he expects the Chinese to begin allowing the yuan to rise against the dollar by next spring, at a rate of about 5 percent a year. At that pace, it would take until around 2015 for the two currencies to be in balance — a process Zandi said could help narrow the U.S. trade gap with China, which last year hit $268 billion. U.S. manufacturers won't likely be satisfied. They want the administration to push Beijing to raise the yuan's value further and faster. Their exports have been hurt by China's move last year to peg the yuan to the dollar. They contend the yuan is undervalued by up to 40 percent. From 2005 to 2008, the Chinese had allowed the yuan to rise about 20 percent against the dollar. It started pegging its currency to the dollar in mid-2008, once the global recession began hurting China's exports.
The United States also needs China's help in dealing with foreign policy threats. Those include curbing the nuclear ambitions of North Korea and Iran. There's another reason for a gentler U.S. stance: Analysts believe China already signaled last week that it was preparing to let its currency rise against the dollar. That shift could eventually aid U.S. manufacturers. It might also feed a U.S. economic rebound. But China is also applying some pressure on the U.S. about its currency. On Sunday, China's top bank regulator said the weak dollar and low interest rates were distorting global asset prices and posing an "insurmountable risk to the recovery of the world economy," according to a transcript of a speech he made at a financial forum in Beijing. The regulator, Liu Mingkang, said the declining dollar and low interest rates were encouraging a "massive" U.S. dollar carry trade — the practice of borrowing money at low rates in one currency to invest in assets in another currency that offer a higher return. Analysts say China will likely wait months before tweaking the yuan-dollar exchange rate, which now stands at about 6.8 yuan to the dollar. Beijing doesn't want to appear to be bowing to U.S. pressure. Even then, it will take time for the U.S. to benefit. Mark Zandi, chief economist at Moody's Economy.com, says he expects the Chinese to begin allowing the yuan to rise against the dollar by next spring, at a rate of about 5 percent a year. At that pace, it would take until around 2015 for the two currencies to be in balance — a process Zandi said could help narrow the U.S. trade gap with China, which last year hit $268 billion. U.S. manufacturers won't likely be satisfied. They want the administration to push Beijing to raise the yuan's value further and faster. Their exports have been hurt by China's move last year to peg the yuan to the dollar. They contend the yuan is undervalued by up to 40 percent. From 2005 to 2008, the Chinese had allowed the yuan to rise about 20 percent against the dollar. It started pegging its currency to the dollar in mid-2008, once the global recession began hurting China's exports.
POSTED BY:
PALLAVI SINGH
PGDM III SEM
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