Should yuan issue cast shadow over all others in China-US ties?

01/19/2011 Source: Xinhua

The value of China’s currency seems to have been thrust into the spotlight again recently in world media agencies, which are focusing their lens on Chinese President Hu Jintao’s high-profile visit to Washington between Jan. 18 and Jan. 21. However, is such a focus on yuan misplaced in the context of multi-faceted China-US economic ties?

“It’s not justified that the yuan has been on the top of the China-US economic agenda,” said Lv Suiqi, deputy chairperson of the Department of Finance of Peking University. Instead, “they should pay much more attention to areas where their common interests are at stake.”

The reason for the yuan’s now de facto primacy on the U.S. agenda of its economic or even political policy towards China is that the appreciation of the yuan has been deemed as an “immediate and effective solution” to the U.S. economic problem, said Li Xiangyang, an expert at the Chinese Academy of Social Sciences.

But that is no more than a “short-term” solution and its effect is “uncertain and suspicious,” Li noted. While the global financial crisis has devastated U.S. domestic consumption, the most important engine for the U.S. economy for years, it is not realistic for the United States to improve its competitiveness in a short time. In that context, President Obama pins hopes on exports, pledging to double the U.S. exports in five years.

The United States has also argued that a strong U.S. economic recovery will in turn benefit the world economic rebound as a whole. That is also the claim that the U.S. government has used to defend its second quantitative easing action, which pumped 600 billion U.S. dollars into its economy and has been criticized as a quasi-devaluation of dollar. It also has added inflation risks to emerging economies like China.

However, whether the dollar devaluation could boost the U.S. economy and the global economy remains controversial and doubtful both theoretically and empirically, Li said. The real solution, he added, lies in the development of new growth engines.

Indeed the Obama administration has already taken actions to encourage some emerging sectors that show bright prospects. The clean energy sector, for example, is one of them. And it is also in that area that China-U.S. interests seem to converge.

On Jan. 18, China’s Ministry of Commerce spokesperson Yao Jian made it clear that China hopes to expand its imports of energy saving and environmental protection products and technologies from the United States, Europe and Japan. In the meantime, he also urged the United States to relax its hi-tech exports to China and boost its cooperation with China on energy saving and environmental protection technologies.

However, trade, as Yao described in a previous press conference, is no more than “the tip of the iceberg” in the much bigger picture of the China-U.S. economic relations. The focus on the U.S. trade deficit with China could hinder bilateral cooperation in other areas, such as the fiscal, investment and service sector.

Encouraging outbound investment is part of China’s efforts to exploit the potential of its 2.85 trillion U.S. dollars of foreign exchange reserves and balance its international payments. Only less than 1.4 billion U.S. dollars of the 59 billion U.S. dollars of Chinese overseas investment in 2010 has gone to the U.S. market. However, that is a surge of 81 percent over 2009, indicating a huge potential. Yao estimated that the growth this year could top 50 percent.

According to a report by China Daily on Wednesday, Ted Dean, chairman of the American Chamber of Commerce in China, also hopes that the upcoming meeting between President Hu Jintao and U.S .President Barack Obama could focus on “opportunities for cooperation,” such as “energy and climate change” where “interesting win-win solutions” are possible.

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