U.S. Will Urge China to Boost Interest Rates in Washington Talks
May 9 (Bloomberg) -- Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan.
Geithner will say China should relax controls on the financial system, give foreign banks and insurers more access and make it easier for investors to buy Chinese financial assets, said David Loevinger, the Treasury Department's senior coordinator for China. Officials from both nations are meeting in Washington today and tomorrow as part of the annual Strategic and Economic Dialogue.
The U.S. is pushing for greater market access for financial firms as part of its broader effort to persuade China to ease the restrictions blamed for fueling global imbalances. U.S. officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March.
"It's pretty clear that the current system is hurting them in their inflation fight," said Dan Dorrow, head of research at Faros Trading LLC, a currency trading firm in Stamford, Connecticut. "The reason for that is the improperly-priced exchange rate."
China has raised interest rates four times since late last year and reserve requirement on banks seven times. The benchmark one-year lending rate was lifted 0.25 percentage point to 6.31 percent on April 5. The benchmark one-year deposit rate stands at 3.25 percent after four 25-basis-point increases since October.
The median forecast of 26 economists surveyed by Bloomberg News is for an annual inflation rate in April of 5.2 percent, down from 5.4 percent in March.
Chinese officials, for their part, blame record U.S. budget deficits for contributing to lopsided global flows of trade and investment. China held $1.15 trillion in Treasuries at the end of February, more than any other country. The U.S. trade deficit with China came to $18.8 billion in February.
Vice Finance Minister Zhu Guangyao said on May 6 that China is paying "close attention" to U.S. efforts to reduce its budget deficit, and his country will focus on improving the quality of its exchange-rate mechanism.
Geithner and Vice Premier Wang Qishan will meet alongside Secretary of State Hillary Clinton and State Councilor Dai Bingguo at this week's meetings, which will draw about 30 top Chinese officials.
The Obama administration and U.S. lawmakers say China's currency policy gives the nation's exporters an unfair competitive advantage, costing U.S. jobs. Geithner is trying to convince Chinese officials that a stronger yuan has benefits for their economy.
Geithner said last week that allowing the yuan to rise and making their financial system less dependent on government- controlled interest rates would give Chinese leaders an "enhanced" ability to damp inflation.
The Treasury argues that higher interest rates on deposits will also encourage consumer spending in China, another way to reduce imbalances.
"We're going to encourage China to move more quickly in lifting the ceiling on interest rates on bank deposits in order to put more money into Chinese consumers' pockets," Loevinger said at a briefing last week in Washington.
Investors are betting the yuan's rise may be limited over the next 12 months. Twelve-month non-deliverable yuan forwards dropped 0.81 percent last week to 6.3520 per dollar on May 6, their biggest weekly loss of the year, on speculation that China won't allow faster appreciation to reduce inflation.
The yuan closed little changed in Shanghai on May 6, ending a run of seven weekly gains that drove the currency to a 17-year high of 6.4892 on April 29, according to the China Foreign Exchange Trade System.
John Frisbie, president of the U.S.-China Business Council, said support for a stronger yuan among Chinese leaders has increased in the past year.
"The strong hand has switched over to those who are saying that the exchange rate can help us fight inflation," Frisbie said in a telephone interview. He said his group, whose members include companies such as Apple Inc., JPMorgan Chase & Co. and Coca-Cola Co., wants China to resume opening its financial services sector to allow more foreign investment.
The American Chamber of Commerce in China said in a report last month that foreign banks play an "insignificant role" in China.
Foreign lenders' market share in China has dropped since the government first opened the industry in December 2006. Banks such as New York-based Citigroup Inc. and London-based HSBC Holdings Plc want to tap household and corporate savings that reached $10 trillion in January as China overtook Japan to become the world's second-biggest economy.
The U.S. has delayed its semi-annual foreign-exchange report, which had been due on April 15, until after this week's meetings. The previous report, due on Oct. 15, 2010, was released on Feb. 4 and declined to brand China a currency manipulator while saying the No. 2 U.S. trading partner has made "insufficient" progress on allowing the yuan to rise.
The yuan goes beyond the U.S. and China to become "a multilateral issue, in terms of the impact on Brazil, Korea, Thailand and India," said Edwin Truman, a former Federal Reserve and Treasury official who is now a senior fellow at the Peterson Institute for International Economics.
The "slow" appreciation of the yuan "relative to the dollar in an environment where the dollar is going down against other currencies is causing trouble for other countries and currencies," Truman said.
Diplomats at the Strategic and Economic Dialogue also will discuss events in the Middle East, including military operations in Libya and the ramifications of the region's popular uprisings.
Officials are likely to discuss efforts to revive six-party talks on North Korea's nuclear program. Negotiations between the two Koreas, Russia, Japan, China and the U.S. stalled in December 2008 and tensions flared on the peninsula after North Korea's Nov. 23 bombing of a South Korean island.
"We want to compare notes on where we stand with respect to North Korea, and we will be very clear on what our expectations are for moving forward," Kurt Campbell, assistant secretary of state for East Asia, said on May 5.
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