Geithner in Beijing talks as yuan speculation mounts

Treasury Secretary Tim Geithner in Washington, March 29, 2010.

BEIJING/WASHINGTON (Reuters) - The Chinese yuan and other Asian currencies rose briskly on Thursday as speculation intensified that China might soon revalue its currency and unveil a long-awaited shift in its exchange-rate regime.

The New York Times reported that Beijing was very close to announcing a "small but immediate" revaluation and would then let the currency fluctuate more widely.

The dispatch from Hong Kong, which quoted people with knowledge of the policy consensus emerging in Beijing, coincided with a brief visit to the Chinese capital by U.S. Treasury Secretary Timothy Geithner for hastily arranged talks with Vice Premier Wang Qishan.

A short statement from the U.S. Treasury, which made no mention of currencies, said the two men exchanged views on U.S.-China economic relations and the global economy.

They also discussed other issues related to a U.S.-China Strategic and Economic Dialogue meeting due to be held in Beijing in late May.

A Treasury official in Washington said Geithner and Wang met for 75 minutes in the VIP terminal of Beijing airport, each accompanied by a single aide. Geithner, who had first stopped in Hong Kong after a visit to India, then left for Washington.

Despite the official silence, a late advance in the yuan in Shanghai trading to 6.8235 per dollar -- the strongest rate since October 2009 -- fanned talk that change was afoot.

Geithner has repeatedly argued that it is in China's, as well as the world's, interest to let the yuan strengthen.

Its rise on the day was slight but nevertheless significant since the People's Bank of China tightly controls the currency's movements through its interventions in the market.

In offshore markets, three-month dollar/yuan non-deliverable forwards fell to the lowest level since July 2008, implying a 1 percent rise in the Chinese currency over that period. Other Asian currencies rose in sympathy.

"The U.S. dollar got smashed down against the South Korean won, Indonesian rupiah and Taiwan dollar, not to mention the yuan," said a Singapore-based trader.

TOUGH CHOICE

Beijing has pegged the yuan near 6.83 per dollar since mid-2008 to help its exporters weather the global crisis. But this has drawn increasing complaints from Washington that the yuan is seriously undervalued, handing Chinese firms an unfair trading advantage and effectively exporting unemployment.

Xia Bin, a recently appointed member of the central bank's monetary policy committee, said China should return to its pre-crisis way of managing the yuan as soon as possible.

Between July 2005 and 2008, China operated a managed currency float that saw the yuan gradually gain 21 percent against the dollar.

Xia said that a big rise in the yuan would harm the global economy and U.S. consumers, who would have to pay more for goods imported from China. But he also said that when the yuan starts to appreciate, it may be preferable to have a sharp, rapid appreciation to forestall speculation about further rises in the currency.

"At a certain point, when necessary, it is better to have a quick, prompt appreciation in a bid to fend off speculative capital," he told reporters after a speech in Shanghai.

Chinese policymakers have stressed the gains that currency stability has delivered during the crisis, not least by allowing Beijing to bend its efforts to revive the world's third-largest economy.

China grew 8.7 percent in 2009 and its demand accounted for half of global growth last year, Xia noted.

Beijing also argues that the United States' $227 billion trade deficit with China reflects a low U.S. savings rate -- something that cannot be addressed just by tweaking exchange rates.

"The core interest of the U.S. government at the present is not the issue of yuan appreciation. They all understand that a moderate rise in the yuan's exchange rate will not resolve the fundamental problems of the U.S. economy, nor high U.S. unemployment," Xia said.

But China has been dropping hints that it is preparing to abandon its de facto dollar link.

ASIA MARKETS RISING

China's central bank governor Zhou Xiaochuan has called the yuan's dollar peg part of a special policy response to the crisis, while various government departments have been asking exporters how much of a rise in the exchange rate they could cope with.

The New York Times said Zhou appeared to have prevailed over the Ministry of Commerce, which lobbies for Chinese exporters and opposes a stronger exchange rate.

The paper sketched out a scenario backed by many economists who follow the issue: in conjunction with any initial revaluation -- along the lines of a 2.1 percent adjustment in July 2005 -- China would widen the yuan's daily trading band.

Responding to the report, Democratic Senator Charles Schumer, the leader of U.S. Senate criticism of China's exchange rate policy said "seeing is believing" when it comes to Chinese currency promises.

"In the past when the Chinese government has said it would change its policy, the steps taken were small, halting and temporary. We are dubious that this time would be any different, but will await the details," said Schumer.

The central bank now allows the currency in theory to rise or fall 0.5 percent a day against the dollar. In practice, the bounds of that range have rarely been tested.

The aim of adopting and using a broader band would be to emphasize that the yuan henceforth could fall as well as rise, deterring speculators from assuming the yuan was a one-way bet.

Still, traders are confident that the yuan would trend higher as China's economic clout grows, permitting other central banks in the region to let their own currencies climb without fear of losing competitiveness to China.

As a result, most Asian currencies and bourses have been rising sharply as investors have resorted to more liquid markets to position for a strengthening of the yuan.

The Malaysian ringgit, for example, considered a good proxy for the yuan, has risen 4 percent against the dollar in the past two weeks. The Indian rupee has gained 3 percent against the dollar over the same period.

Meanwhile, authorities in Taiwan, seemingly worried about heightened volatility in their dollar in the run-up to a more flexible yuan regime, on Thursday introduced a new limit on last-minute currency trading.

Speculation that Beijing will let the yuan rise before long has been fueled by a recent easing of Sino-U.S. tensions over the currency.

Geithner said at the weekend he was delaying an April 15 report on whether China manipulates its currency.

A finding to that effect would have been a slap in the face to President Hu Jintao, who is due to visit the United States for a nuclear security summit next week.

Washington and Beijing are trying to patch things up after U.S. arms sales to Taiwan and China's dispute with Google over Internet freedoms made for a rocky start to 2010.

"Tensions are down and both sides are stressing the positive," said Kenneth Lieberthal, a China expert at the Brookings Institution think-tank in Washington. "All the atmospherics have been trending upward in the past couple of weeks."