The White House has finally recognized openness to compromise would be better than coercive persuasion, amid implicit pressure from Capitol Hill. The surprise visit by US Treasury Secretary Timothy Geithner to meet with Vice Premier Wang Qishan cleared the sky over the Sino-US dispute overnight. The White House has waved an olive branch and postponed the currency report in which China might be accused of being a currency manipulator. With President Hu Jintao attending the Nuclear Security Summit in Washington, market participants see it as a sign that China will soon free up the renminbi pegging against the dollar.

Hampered by over-leveraged consumers, the road of recovery in the US will be long and arduous. Although the combined efforts of the Federal Reserve and Department of Treasury have together reinflated the once deflated asset bubble and contracted credit expansion, and may have inadvertently saved asset values for the wealthy, retained jobs for the Wall Street elites, the majority of Americans still suffer from the aftermath of the 2008 crises. The latest US unemployment rate stood at a staggering 9.7 percent. Consumer spending is sluggish and housing markets remain choppy. Deficits on both state and federal governments' ledgers continue to climb in tandem with the burden on social security.

The controversial Medical Reform has already cost the Obama administration a lot of political capital on Capitol Hill. Since Paul Krugman's first salvo on renminbi pegging policy last December, the issue has caught the attention of politicians such as US Senator, Charles Schumer. With the mid-term election approaching, it is not difficult to understand why the legislators on Capitol Hill have desperately needed a "scapegoat" to redirect discontent. However, a stronger renminbi might be in the agenda of Washington, but not necessarily as a solution to the USA's predicaments.

The United States is running multilateral trade deficits with more than 90 countries and the effect of narrowing its overall trade deficit by relying on revaluing a single currency is questionable. The nature of the Sino-US trade imbalance is largely structural. Between 2005 to June 2008, the renminbi has appreciated approximately 21 percent against the US dollar. Yet the US trade deficit with China has grown $104 billion from 2004 to 2008. Although political propaganda has been telling US voters that renminbi revaluation is essential for job creation, the truth is that the flow of cheap imported goods is being driven by US consumers' demand regardless on the place of origin. A strong yuan will only divert demand to Mexico, India, Vietnam or whichever can produce cheaper goods, but not to dearer substitutes produced in Michigan or Texas.

The latest $7.2 billion deficit in March shows clearly that the Chinese economy is not purely export driven. The Sino-US trade imbalance was worsened by the US government's reluctance to allow high technology exports to China. For years, different levels of limitations and barriers were posted by the Congress, limiting China to shop with a restricted list. The United States has successfully boosted its economy through high tech industries during the past decades, yet has been unwilling to capitalize on one of its largest trading partners.

China has its own renminbi agenda, which is largely economic stability. As President Hu pointed out in the first day of the Summit, any action must take into account its own imprint on economic and social-development. The peg against the US dollar at 6.83 renminbi was just one of the numerous policies launched to cope with the 2008 crises. The primary goal of China was to boost both the public and private sectors and not to "manipulate" a currency or export the problem to her trading partners. Nevertheless, given its significant size, export remained crucial to the Chinese economy. Any significant appreciation of the renminbi will erode the export competitiveness overnight and impact the livelihood of tens of millions workers employed.

Any change of Chinese currency policy have to be limited within the scope that it will help meet the government's target GDP growth at a pace of 8 percent per annum and its determination to contain the CPI. The stimulus package has successfully boosted the Chinese economy. However, with the global economy still riddled with uncertainties, the Chinese government can neither decelerate the economic engine, nor let the inflationary heat threaten the livelihood of its population. Demand for raw materials, accompanied by the credit expansion, has already fueled the CPI. The central government has to maneuver its monetary policy delicately to cope with the liquidity issue. While gradually lifting interest rates and bank reserve requirements helps to cool off the economy moderately, a sizable liquidity is still spilling over into the equity and property markets.

Consumer prices rose 2.7 percent year-on-year in February, a significant climb from 1.5 percent in January. A slightly stronger renminbi might ease part of the inflationary pressure and be beneficial to the overall economy, given that the government certainly has studied plans to lift the currency. However, that would largely depend on weighting the cost/benefit ratio of loss of manufacturers' exports against boosting domestic consumer spending and in hope of minimizing the impact on society. Throughout this process, China is aiming to avoid the painful lesson of the yen's appreciation during the 80's.

In my assessment, if the central government resolves to change the currency policy, it will likely either expand the bandwidth by allowing a limited floatation of renminbi against dollars, or revalue the currency at a reasonable pace, not exceeding 5 percent against the dollar within the next 12 months, and of course, based on China's own estimation of the speed of absorbing the loss in exports through growing domestic consumption.

Professor Wang Guanyi is a visiting professor at Asian International Open University, the founder of www.wongsir.com.hk, the chief strategist of Crown One Asset Management, and a financial commentator at NOW business news. The opinions expressed here are entirely his own.

(HK Edition 04/16/2010 page3)