Terence Poon
The Wall Street Journal
February 9, 2010

It may seem like the stars are aligning for China
to let its currency rise, but recent tough talk
from the U.S. may make such a move less, rather than more, likely.

U.S. President Barack Obama’s talk last week of
monitoring exchange-rate policies may be welcome
in Washington, but counterproductive in Beijing.
Rather than encourage China to let the yuan, or
renminbi, rise against the U.S. dollar, Obama’s
tough stance may discourage China from budging,
especially when ties with the U.S. are worsening over Google, Taiwan and Tibet.

As Credit Suisse economist Tao Dong put it Friday
in a research note, "movement in the RMB exchange
ultimately is a political decision, and the
Chinese leaders will want to avoid being seen
domestically as bowing to foreign pressure." ING
Financial Markets economist Tim Condon said
Thursday the government "tends to freeze economic
policies when political tension increases, which
we think reduces the likelihood of any move on
the renminbi in the current environment of
elevated US-China political tension."

The reasons for exiting the policy of keeping the
yuan steady versus the U.S. dollar- -- one in
place since July 2008 -- have become more solid
in the past few months: Exports rose in December
from a year earlier, after dropping for 13
months, and likely rose further last month;
economic growth soared above 10% in the last
three months of last year; and Beijing still
wants to rely more on domestic demand for growth,
which an appreciation of the yuan would encourage.

But relations with the U.S. have been worsening
since the start of the year as both sides bicker
over a wide range of issues: trade of chickens,
electric blankets and other products; U.S. arms
sales to Taiwan; Obama’s scheduled meeting with the Dalai Lama; and Google.

Beijing’s been unusually assertive, saying, for
instance, that it’ll punish U.S. companies
involved in Washington’s plan to sell weapons to
Taiwan. Beijing may grow yet keener to project
strength by maintaining the currency status quo
amid the wintry political climate. After Obama’s
remarks, state-controlled China Daily, an
English-language newspaper, said in a front-page
article Friday that Beijing "won’t fold on RMB,"
while Foreign Ministry spokesman Ma Zhaoxu said
at a semiweekly briefing Thursday the exchange
rate has never been a major cause of bilateral
trade imbalances and outside pressure won’t help resolve the issue.

None of which is to suggest that China is
resisting a movement on the currency just to
spite the U.S. It has reasons for caution. Were
the December export data a blip or a trend? Is
inflation really getting out of hand? Still, the
domestic debate over exiting the "stable yuan"
policy had begun to intensify by early January. A
researcher at the Chinese Academy of Social
Sciences recommended Beijing strengthen the yuan
by 10% in one go, while Chinese Vice Commerce
Minister Zhong Shan said Monday the currency
should remain "basically stable" but could be
given more room to move if conditions are right.

With bilateral ties deteriorating, however, the
economic arguments against, rather than for,
letting the currency rise, may look more
appealing to the politicians in Beijing.