China tries to cool yuan dispute with U.S.

An employee counts U.S. dollar banknotes at a branch of Huaxia Bank in Shenyang, Liaoning province March 18, 2010.

BEIJING (Reuters) - China on Friday said it was sending an envoy to Washington to try to ease trade frictions as its currency regime comes under fire, warning that threats from U.S. legislators could stifle room for progress.

The announcement, along with conciliatory comments by China's commerce ministry, appeared aimed at cooling an increasingly rancorous dispute that has U.S. senators threatening to slap duties on Chinese products if Beijing does not allow the yuan to rise.

"Channels of communication between our two sides are open. All issues of concern to either side can be discussed through these channels," He Ning, head of the commerce ministry's North American division, told a media briefing.

But China gave no indication it was ready to abandon its commitment to a stable yuan exchange rate, and market expectations of appreciation remained muted.

He and other officials at the briefing stressed that the United States remains a key market for Chinese goods, and Beijing wants to douse risks of a backlash.

"Sending an official to Washington sends a signal that China wants to talk through these issues and doesn't want to escalate this conflict," said Wang Yong, a professor at Peking University who studies China-U.S. economic ties.

Fruitful discussion was possible only if Washington checked politics and emotions at the door, said He.

"This will make the whole situation more complex, imposing disturbance from outside on our normal channels of communication," said He.

Political pressure is certainly building. Many in Congress are demanding tough action if China resists appreciation. The U.S. Treasury will next month issue a key currency report and contention over policy toward China could be magnified by mid-term Congressional elections in November.

TALKS

China said Vice Commerce Minister Zhong Shan will visit the United States from March 24-26 for discussions focused on the "Sino-U.S. trade balance and trade frictions."

"I think that the Chinese official will lay down China's stance, but also try to get a finer understanding of the views in Washington and report them back to here," said Wang, the Peking University professor.

Zhong, however, would not be in any position to negotiate substantive decisions, said Wang.

"The fact is that it will take time for China to transform its mode of economic development, including its exchange rate system," said He.

Zhong is slated to meet U.S. Treasury, trade and commerce officials, as well as a leading U.S.-China business group.

"The discussions between Vice Minister Zhong and Ambassador Marantis will focus on trade remedy matters, including the policies and practices and economic conditions that give rise to the use of trade remedies," said a spokeswoman for the U.S. Trade Representatives office. Demetrios Marantis is the deputy U.S. trade representative.

It was not clear whether Zhong would meet U.S. lawmakers, whose angry criticism of Chinese trade policies will be on display again at the House of Representatives Ways and Means Committee hearing on the currency issue on March 24.

Many in the U.S. Congress want Beijing to revalue the yuan by as much as 40 percent and say they have patiently waited for China to move on its own. The lawmakers say a revaluation is needed to help correct skewed trade flows that give an unfair competitive advantage to Chinese goods.

China has held the yuan near 6.83 per dollar since the global credit crunch hit in mid-2008, though Beijing says the currency stability has benefited the global economic recovery.

A semi-annual U.S. Treasury report due on April 15 could label China a "currency manipulator," adding to pressure on Beijing and threatening a deepening rift between the world's biggest and third-biggest economies.

If China is formally classified as a currency manipulator, the U.S. Treasury must quickly launch talks with Beijing, raising pressure for concessions, although U.S. law offers an escape clause to avoid that step.

GRADUAL APPRECIATION?

Just last week, market expectations were growing that a solid recovery in Chinese exports and a build-up in inflationary pressure might prod the government to permit yuan appreciation.

Investors have this week scaled back their bets on any imminent move on the view that Beijing will find it politically unpalatable to appear to cave into U.S. pressure.

The yuan was bid just a touch above a three-week low in offshore forwards on Friday, implying expectations of 2.5 percent appreciation over the next 12 months.

The U.S.-China Business Council, a group that Zhong is set to meet with next week, has urged China to "allow market influences be reflected in the exchange rate" as it began doing from 2005-2008, its president, John Frisbie, said.

"My guess is that they are probably looking at resuming the gradual appreciation that they stopped in July 2008," he said, citing factors such as inflation concerns in China and a return to growth in Chinese exports.

"Economics would suggest that, but when the economics start having politics intervene you don't know," said Frisbie.

(Writing by Simon Rabinovitch; Editing by Ken Wills, Kazunori Takada and Leslie Adler)