The US treasury secretary Timothy Geithner revealed a considerable, and indeed sensible, softening of his country?s stand on the revaluation of the yuan at the end of the two day US-China strategic and economic dialogue. Geithner stated in no uncertain terms that yuan reform is something that is entirely up to China and not subject to US pressure. As we have argued in these columns, US pressure on China would only have been counterproductive to the cause of a yuan revaluation. It remains in China?s interest to allow some gradual appreciation of its currency as the economy overheats?there are already significant upward pressures on asset prices in particular and inflation in general. The US government has finally fallen in with this line of reasoning.
A gradual appreciation of the yuan is, of course, expected to address the huge imbalance in trade between the US and China in the medium term. But a sudden revaluation of the yuan may have a detrimental effect on China?s short-term growth prospects, by hitting its exports. This is something that should be avoided in the current global economic scenario that is still prone to the possibility of a double dip recession. Europe is still in a downward spiral with no clear solution to the problem of sovereign debt. The US is still in a very nascent stage of recovery, growing only marginally. Japan seems to be for ever stuck in a stifling low level equilibrium. That leaves China and India as the fastest growing major economies in the world, and the prospect of rapid global recovery depends on what happens in these two countries. China is obviously the bigger player, especially for the US, and it is therefore in the US?s interest to also ensure that there is no sharp slowdown in China. That will simply cause more pain, and not aid recovery, in the US. Interestingly, the US trade representative Ron Kirk, who also took part in the dialogue, chose to stress the importance of removing other (non-currency) barriers on US exports to China. He also expressed concern about China?s relatively weak intellectual property regime, which harms US exports. Kirk argued that addressing these concerns could have as important an impact on the trade balance as revaluation of the yuan. This is perhaps what the US is bargaining for in return for a concession on yuan revaluation. In any case, a cooling down of a prospective trade war between the US and China, a very real prospect over the last few months, is good news for the global economy.
