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China Cautious Over Currency Flexibility

During the sixth session of the U.S.—China Strategic and Economic Dialogue (S&ED), held in Beijing from July 9 – 10, 2014, the United States urged China to help support the global economy by making changes to its exchange rate policy.

Since March, when China loosened its daily trading limits on the yuan from 1 percent to two percent, there has been talk about just how flexible the People’s Bank of China could become. But the PBoC, which sets the parity rate against the U.S. dollar, has been reluctant to allow full flexibility, citing concerns that the international market was not yet stable.

On the first day of the S&ED talks, China’s finance minister Lou Jiwei said the economy had not recovered enough for Beijing to feel comfortable in relaxing its grip on the yuan. “It’s very difficult for us to refrain from intervention” in foreign exchange markets, he said, according to The Wall Street Journal. Although Lou said China’s economy was “stable,” he urged the U.S. to work harder to help spur global growth.

Some U.S. lawmakers are concerned that China’s tight grip on the yuan is stifling U.S. business interests. Senator Charles Schumer (D, NY), along with a bipartisan group of senators, has said that by intentionally keeping the yuan low, China is manipulating its currency and making it harder for U.S. businesses to thrive in the global marketplace.

After two days of talks, however, it appeared that both sides had reached some consensus. “China is making preparations to adopt greater transparency, including on foreign exchange, which will accelerate the move to a more market-based exchange rate,” Treasury Secretary Jack Lew said at a news conference.

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China agreed to reduce its intervention “as conditions allow,” according to a joint statement. Secretary Lew called this a “big change.” Additionally, Reuters reported that Zhou Xiaochuan, governor of China’s central bank, who spoke from the sidelines of the S&ED on July 10, said “the government would increase the flexibility of the yuan currency and reduce market intervention.” Despite these promises, analysts caution that China is not ready to fully commit to a market-directed currency rate for the yuan.

Led by Secretary of State John Kerry and Secretary Lew for the U.S., and Vice Premier Wang Yang and top diplomat Yang Jiechi for China, the two-day talks also covered cyber espionage, climate change, and military relations. Despite –or because of – the friction between the U.S. and China, the S&ED talks continue to provide a forum for constructive dialog and relationship building between the two nations.

The main benefit of the talks, established by President Obama in 2009, is to deliver “concrete, meaningful and sustained progress over time on long-term strategic and economic objectives,” according to the Treasury.

Certainly, these recent talks have helped to further that objective. In his opening remarks, Chinese President Xi Jinping said, “Confrontation between China and the United States would be a disaster and both must respect each others’ sovereignty.” He also stressed that “China and the United States’ interests are deeply interconnected. Cooperation will lead to win-win results while confrontation will hurt both,” according to Aljazeera.

While the talks have not yet produced any significant accords, the U.S. and President Obama have stressed the need to keep the lines of communication open, and to maintain good relations with China as its influence spreads.

When President Obama visits Beijing in November for APEC, the question of currency will likely be introduced again. Presumably, the groundwork laid out during these talks will help to encourage further productive conversations. According to Aljazeera, Kerry said, “We welcome the emergence of a peaceful, stable, prosperous China that contributes to the stability and development of the region, and chooses to play a responsible role in world affairs.” He added, “We have a profound stake in each others success. I can tell you that we are determined to choose the path of peace and prosperity and cooperation, and yes, even competition, but not conflict.”