China Reiterates Decision To Retain Autonomy in Currency Policy

Four days before US and China high level officials meet for the highest level China-US Strategic and Economic Dialogue, China once again reiterated its decision to retain autonomy in making own decision on currency policy. China also hinted that China and the United States have reached a 'quiet communication' consensus over the RMB issue.

China's Assistant Finance Minister Zhu Guangyao sent out a clear message about the direction of the Chinese currency Renminbi (RMB) reform direction and time frame. He also reduced observers and outsiders' expectation about the discussion of RMB exchange rate in the coming week's second round of Sino-US Strategic and Economic Dialogue to be held in Beijing. Zhu Guangyao has provided a realistic market view about the possibility of the appreciation of RMB situation in the days to come.

Currency Reform Measure
Citing Chinese national leaders' earlier remarks of upgrading China's currency exchange mechanism to 'acts of national sovereignty level', China's Assistant Finance Minister Zhu Guangyao told the press that 'China's specific reform measure has to be based on the change and development in the overall world economic situation. The Chinese Government will take independent coordination to consider and to push forward currency reform measure.'

'What I want to specifically emphasize is that China will not advance its currency reform in particularly when China is under external pressure. External pressure and noise will do nothing but slow our currency reform process.' Minister Zhu's statements echoed China's Prime Minister Wen Jiabao's warning two months ago when the latter said that putting pressure on China and forcing China to revaluate and appreciate RMB would be counter-productive.

The second round of China-US Strategic and Economic Dialogue will be held in Bejing beginning 24 May. US Secretary of State Hillary Clinton and the US Secretary of Treasury Timothy Geithner will lead the US delegation to this year's high level bilateral dialogue with China. China will be represented by China's Vice Prime Minister Wang Qishan and China's State Councilor Dai Bingguo.

From the beginning of this year until today, a series of trade and strategic issues exacerbated tensions between China and the United States. The coming Dialogue should provide an opportunity for both nations to address these tension issues.

Based on China's Assistant Finance Minister Zhu Guangyao 's introduction, this Second China-US Strategic and Economic Dialogue, co-chaired by Wang Qishan and Timothy Geithner, will discuss the European sovereign debt crisis and its impact on the world economy in order to promote sustainable international fiscal policy; to build an open investment environment; to promote open trade in order to further deepen the reform of international financial institutions; among other related issues.

There are indications to show that at this Second China-US Strategic and Economic Dialogue, in the light of both countries' concern about the present European sovereign debt crisis and the worsening investment climate for Chinese enterprises in Europe, China's RMB issue will not be considered by both countries as a major issue as focus of attention at the Dialogue. At this moment, what we understand is that as far as China's currency exchange rate is concerned, the consensus between China and the US is to deal with this delicate issue in a low profile manner.

China-US Sensitive Issues To Adopt 'Quiet Communication' Strategy
Minister Zhu Guangyao also confirmed that although the RMB exchange rate would be one of the agenda in the Second China-US Strategic and Economic Dialogue, he also said that 'as the overall Sino-US economic relationship, the RMB exchange rate issue is only one of the issues. He said: 'This (exchange rate) is only one of the issues among the many issues in China-US bilateral economic issues. On sensitive bi-lateral economic issues, China and the United States should maintain 'quiet' communication.'

He also said: 'For sensitive issue such as the currency exchange rate, we hope both countries can keep the agreed upon spirit of 'quiet' strategy to engage in communication and dialogue. This should allow the views from both sides to be able to express fully so as to allow both countries to have deeper understanding on the same issue. This should help to push forward and promote the bilateral cooperation in macroeconomic policies between the two countries.'

All along, on resistance of foreign intervention on China's RMB exchange rate, the Chinese Government's policy has adopted the policy to deal with the issue in accordance with the 'autonomy, gradual and controllable' principle. However, from the US perspective, after the US Treasury suffered political pressure coming from the Congress to pressure China on appreciation of RMB, the US Treasury has delayed in submitting its semi-annual currency report to the US Congress since last month. As such, to the United States, the RMB exchange issue is still an outstanding issue for the US Government. However, market analysts have predicted that even without pressure coming from foreign countries, China's RMB will have a minor adjustment to appreciate from between 3 percent to 5 percent this year.

In Europe, the recent Euro crisis caused by the national debt crisis in Greece has led to many observers to opine that China may delay the measure to allow its RMB decoupling with US dollar. Substantial depreciation of the euro this year has led to the RMB exchange rate against the euro to appreciate more than 15 percent. To the Chinese enterprises that rely heavily on the current RMB exchange rate to maintain their market competitiveness, such development in Europe has resulted in significant export costing pressure to China's enterprises. As such since Europe is China's largest export market, the economic growth prospect of the European Union has also caused grave concern to the Chinese government officials.

European Sovereign Debt Crisis
Zhu Guangyao said: 'I hope that the main currency used as major monetary reserve can maintain a basic stability.' Zhu's remarks further implied that the dollar peg of the RMB exchange rate is unlikely to change.

As for the measure to cope with the European sovereign debt crisis, Zhu Guangyao pointed out that: 'Countries including China and the United States should strengthen coordination of macroeconomic policies. Both nations should make the G20 mechanism to become the main platform to play the actual role of governance on world economy. This can strengthen the international community's capacity to respond to this kind of economic crisis and challenge.'

Fiscal Deficit-GDP Ratio
Under the larger backdrop of possible expansion of sovereign debt crisis, Zhu Guangyao acknowledged that China is concerned about the growing US federal budget deficit.

He said: 'We hope that the US fiscal deficit-Gross Domestic Product (GDP) ratio can gradually be reduced in its economic recovery process to attain a sustainable level.'

China is now the largest holder of the US Treasury bonds. According to the US Treasury Department's international capital flows report released on 17 May, for the month of March the China's holdings of US Treasury bonds has increased US$17.7 billion dollars (approximately $24.5 billion), making the total China's holding of US Treasury bonds reaching $895.2 billion dollars. This was the first time China purchased US Treasury bonds since September 2009.