Does A Cozy Relationship Between The United States and China Signal A Stronger Yuan?

By Holly Stubbs

Recent positions by China and the United States have suggested a more strained relationship, but new developments suggest that the two government are reaching a reconciliation.

The Obama administration’s initial conciliatory tone towards China had been replaced with a more hard line stance. The United States backed Google’s very public withdrawal from China due to censorship concerns (and perhaps more importantly due to sophisticated hacking attacks that most likely originated with the Chinese government). This was shortly followed by Hillary Clinton advocating that a free Internet is a fundamental human right. These positions, along with sales of arms to Taiwan, have resulted in China making several fiery responses against the United States in its state run media outlets.

These public squabbles do not undermine the reality that neither country can disregard the other. China needs the United States to have a strong (and open) economy to feed its growth. The United States wants China to back sanctions against Iran and to strengthen its currency.

Economists have believed for years that the Chinese government has been keeping the yuan artificially weak to increase its exporting power. Many of the world’s power economic players are pushing behind the scenes for China to re-evaluate its currency exchange rate. This push is coming not just from the United States and Europe, but, more quietly, from its Asian allies, as well as top Chinese CEOs. There is evidence that the Chinese economy is over-heated and that they are heading for a real estate bubble of their own. If China strengthened the yuan it would slow the economic growth and it would help American and European exports, both of which have been struggling in this recession. To pressure China into changing its currency value the Obama administration recently delayed a report to Congress in which it had the option of citing Beijing as a currency manipulator, a designation that could lead to a World Trade Organization complaint and possible trade sanctions.

This powerful bargaining chip and the political posturing appear to have paid off. There are signs of a warmer relationship between the US and China. Secretary of State Clinton recently announced that the Chinese were closed to backing (or at least abstaining from) a UN Security Council vote to place tougher sanctions on Iran, and more importantly, US Treasury Secretary Timothy Geithner is traveling to China on Thursday to meet with China’s vice premier for economic affairs.

Geithner’s visit signals that China and the United States are coming closer to a resolution of their dispute over the value of the Chinese currency. This will most likely mean a slightly stronger yuan. Obama and Chinese President, Hu Jintao will meet on April 12th – 14th. The value of the yuan will likely be a major topic of negotiation and any change to the yuan would probably happen some time later this year.

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