What is the current trouble between China and US? -The issue of currency!

No one denies that China and US have been always quarrelling, protesting since the bilateral diplomatic relation is built. While disputes before the 1990s tend to be more political, and it turns to be much more economical after 2000.

Take it easy, it is a play.

15 US senators started to criticize the Secretary of Commerce on February, dissatisfied with Locke's failure to fully investigate the allegations against the Chinese RMB exchange rate. While On 14, March, Chinese Premier Wen Jiabao responds that the RMB is not undervalued. On the contrary, the RMB has appreciated by 14.5 per cent during the period of financial recession, contributing to the recovery of the global economy. Even if the Chinese RMB exchange rate needs re-examining, it depends on performance of the Chinese economy. So, Wen's speech signals that the Chinese government declines the allegation from the US side, and China will not adjust its exchange rate. Then, the dramatic climax comes. Following the day after Wen's response, Mike Michaud and Tim Ryan in US congress sent a letter, singed by 130 congressmen to US Treasury Secretary Tim Geithner and Commerce Secretary Gary Locke, urging that the growing problems associated with China's continued currency manipulation should be immediately addressed.

Although the currency dispute, seen from the media, seems irreconcilable, while bilateral dialogues and consultation up to the government level has never stopped. Anyway, Chinese are fond of this style. And the recent result indicates that a partial progress has been achieved in this matter. That is why US Treasury Secretary Tim Geithner says that he would delay the report about China's currency manipulation, after a series of high-level international meetings, including China and US.

Can RMB appreciation help US export?

The famous letter, signed by 130 members of US congress, aims to push for actions to resolve China Currency Manipulation. The key argument in there letter is that China's currency manipulation essentially subsidizes Chinese exports, leading to the improvement of China's manufacturers' competitive strength relative to its US counterparts. Therefore, it hurts business production, job creation, as well as the overall economic recovery.

It seems logical. However, it ignores that financial measures, such as currency adjustment, cannot bring out immediate improvement for the US foreign trade, since it takes time, and needs multinational cooperation.

On March, 2006, China's RMB was pushed to appreciate the same situation as the current one, and China did. But RMB's significant appreciation did not improve the balance of payments for US fundamentally. And US has to depreciate its US Dollar relatively to ease its deficit burden after financial recession. So, the history indicates there are more important barriers, disturbing US exports acceleration.

Furthermore, China is not the sole country, which conducts the pegged exchange rate system. There are countries like Vietnam with the same exchange system, and they intentionally depreciate their currencies to produce comparative advantage. If China's noise to the world trade is addressed by RMB's appreciation, will US force these countries with pegged system follow currency adjustment? Will they cooperate?

China, not declines to reforming, but asking for time

China has the ambitious plan to reform its current financial system, and currency reform is included and taken as a crucial step. However, China tends to conduct a gradual reform, so that it would not allow its RMB to appreciate suddenly by a large margin. If so, Chinese would be scared of their shocks resulted from reform.

As the currency appreciates, industrial structure reform is also conducted. It needs time for China to adjust its developing mode from over-relying on exports to self-driven by domestic consumption. So, China still waits for structural transform. That is why China turns to be passive in terms of its RMB reform. If this reform is conducted immediately, the larger structural reform would be disturbed.

Will the RMB appreciate?

In terms of RMB appreciation, it seems China is not the only player, while US is included as well. One wants it happens later, but one wants it happens quicker, so what? I insist that RMB would have a winding, tortuous appreciate, but the time about every appreciation step could be hardly forecast to eliminate speculation.