China questions dollar dominance

The US is accusing China of undervaluing its currency to get an unfair trade advantage [EPA]

The Chinese president has resisted US arguments about why China should let its currency strengthen, saying the dollar-based international currency system is a “product of the past”.

However, Hu Jintao admitted that it would take a long time to make China’s yuan (RMB) a world currency.

“China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,” he told two US newspaper in a written interview ahead of his visit to th US next week.

“But making the RMB an international currency will be a fairly long process.”

Critics say China intentionally undervalues the its yuan to make its exports cheaper and gain a trade advantage, contributing to the huge US trade deficit.

Hu said arguments that allowing the yuan to appreciate would curb inflation are too simplistic, adding that China is fighting inflation with a range of policies including interest-rate increases.

‘Moderate inflation’

While inflation in China hit a 28-month high in November, Hu told the Wall Street Journal and the Washington Post that prices were “on the whole moderate and controllable.”

“We have the confidence, conditions and ability to stabilise the overall price level,” he said.

US legislators are among the biggest critics of China’s exchange rate policy. Three Democratic senators – Charles Schumer, Debbie Stabenow, and Bob Casey – said on Sunday that they would propose legislation to try and fix the problem.

The legislation would impose stiff new penalties on countries that the treasury department designated as currency manipulators. The treasury has not labelled any country a currency manipulator since July 1994 when it cited China.

On other issues, Hu struck an upbeat tone about ties with the US.

 “We should abandon the zero-sum Cold War mentality,” he said and “respect each other’s choice of development path.”

The president suggested co-operation with the US in areas like new energy sources, clean energy, infrastructure development, aviation and space.

“Both sides should keep to the right direction in the development of our relations, increase exchanges, enhance mutual trust, seek common ground while reserving differences, properly manage differences and sensitive issues and jointly promote the long-term, sound and steady development of China-US
relations.”

Optimism on Koreas

He also expressed optimism about the outlook for resolving tensions on the Korean peninsula, an area of concern to both Washington and Beijing, saying he sees signs of decreasing tensions between the North and the South.

 “Thanks to joint efforts by China and other parties, there have been signs of relaxation,” Hu said. He was convinced “an appropriate solution to the Korean nuclear issue” could be found, a reference to North Korea’s nuclear arms programme.

The Chinese leader, who is expected to step down as president and general secretary of China’s Communist Party in 2012, arrives on Wednesday in Washington for his first and last state visit.

Eswar Prasad, a Brookings Institution economist and former International Monetary Fund, said Hu’s generally conciliatory tone augured well ahead of his Washington meetings with Barack Obama, the US president, and other officials.

“Hu makes it clear that China intends to move forward on opening its markets, freeing up its exchange rate and restructuring its political system, but at its own pace and with little heed to external pressures for more rapid or broader reforms,” he said.