Serge Abou, EU ambassador to China, is succinct in his assessment of how best to handle the row over renminbi appreciation. "What China hates above all is to act under foreign pressure," he said. The US should take heed.
Developed Western nations, as well as several of China’s neighbors, have if not sternly advised, then softly pleaded with Beijing to allow its currency to resume appreciation to reflect – in the words of US President Barack Obama – a "more market-oriented currency approach."
China has kept the renminbi at a fairly steady pegging to the US dollar since mid-2008. Beijing’s move allowed further opportunities for growth and protected jobs as the global economy, and export markets with it, ground to a halt.
Zhou Xiaochuan, governor of the People’s Bank of China, said at China’s annual parliament meeting in March that the peg to the dollar was a "special measure … [that] sooner or later has to be withdrawn," signaling that Beijng was seriously considering a shift in currency policy. Officials have continued to drip-feed hints that the peg will be removed this year. Recently Chinese business leaders have taken the unusual step – some have suggested it was carefully choreographed by Beijing – of speaking out in favor of a stronger currency.
The US, however, wants to see the renminbi appreciate sooner rather than later. Calls from Congress have been resounding with increasing fervor, placing the executive branch under increasing pressure to produce results.
So far, despite obligatory official pronouncements, the Obama administration has gone out of its way to avoid forcing Beijing’s hand. Obama and Hu met during the latter’s visit to Washington, and Treasury Secretary Timothy Geithner has been busy: first, delaying the release of a Treasury report that threatened to label China a currency manipulator, and then making a surprise visit to Beijing where he held talks with Vice Premier Wang Qishan. The goal has been to convince China to resume appreciation without making it look as though China is responding to external pressure.
Pressure or no, few expect no movement whatsoever. "We don’t think that China can maintain its currency peg to the dollar through the end of the year," said Shen Minggao, China economist at Citi. He said mounting pressures from not only the US and the developed world but also from emerging market economies could see China backed into a corner, and massive trade disputes would likely to follow.
With first-quarter GDP growth at 11.9% year-on-year, exports looking relatively healthy and an uptick in domestic consumption, China knows that it is running out of excuses in preventing the renminbi from rising.
"If China would have to do it sooner or later, it’s more likely within three months to at least thwart some international pressures," Shen said. And with the Strategic and Economic Dialogue scheduled for late May, movement on the currency could come even sooner – but only when Beijing is good and ready.