May 10th, 2011
12:18 PM GMT
Top officials from China and the United States are meeting in Washington this week –- for the third annual Economic and Strategic Dialogue (E&SD). It’s a two-day session for the two powers to speak face-to-face about issues at the heart of their relationship.
But will anything groundbreaking come out of it? If history is any judge (and China has 5,000 years of it), don’t hold your breath. Beijing is in no hurry to rush reforms. Its fear is that sudden moves, as demanded by some hard-line U.S. critics, would destabilize the status quo it knows. Basically, the fear of the unknown is greater than any current fears it feels now.
On Monday, the dialogue started out candidly but fairly positively. In opening remarks, U.S. Treasury Secretary Timothy Geithner outlined the well-known laundry list of bilateral economic issues - but also praised China for its past achievements.
"In China, building on the remarkable reforms of the last 30 years, the challenge is to lay a foundation for a new growth model, driven more by domestic demand, with a flexible exchange rate that moves in response to market forces, with a more open market-based economy."
U.S. Secretary of State Hillary Clinton went even further in her remarks, flatly equating better domestic prosperity to better bilateral ties.
"Some in our country see China's progress as a threat to the United States. Some in China worry that America seeks to constrain China's growth. We reject both those views. We both have much more to gain from cooperation than from conflict. The fact is, that a thriving America is good for China. And a thriving China is good for America."
Still, change will be slowest in the issues of greatest importance.
For example, Daphne Kwok, an HSBC analyst in Hong Kong, told me that critics who want to see a 25% yuan revaluation won’t be happy.
"It's highly unlikely that we will see a sharp one-off (2005-style) appreciation of the RMB, which Beijing ultimately sees as an issue of sovereignty. That said, some meaningful nominal appreciation coinciding with the SED window wouldn't be unheard of."
But that would likely be seen more as a post-dialogue "gift" from the People’s Bank of China than anything else.
As for China’s April trade surplus number which came out today ... well that was just a doozy.
The forecast was for a $3.2 billion surplus. The actual number blew all estimates out of the water: $11.4 billion. That’s the highest so far this year.
HSBC’s Kwok said that could set back China’s leverage in talks this week.
"April's notably wider trade surplus will likely be seized upon by those looking to pressure Beijing into sharply accelerating the RMB's pace of appreciation."
Added pressure yes. But that will not likely turn into reality. To be sure, the yuan has strengthened 5% since last June. Adjusted for rampant inflation hitting the country, that’s actually equal to about a 10% gain. And in the past week the yuan has hit rates not seen since 1993 - today it’s hovering just under the RMB 6.50 mark.
Looking ahead to Tuesday, talks on further yuan revaluation will be of central focus. The argument that the U.S. is now pushing to China: if you let the yuan appreciate more, you’ll be able to tamp down that rocketing inflation -– and keep social unrest, which you fear the most, in check.
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