Increasing global frustration over China's currency waffling threatens to overshadow U.S. President Barack Obama's trade agenda as his first presidential visit to Asia gets under way.
After failing to win an agreement on easing currency controls at the Asia-Pacific Economic Co-operation summit in Singapore over the weekend, Mr. Obama will need careful diplomacy in his meetings with Chinese President Hu Jintao and Prime Minister Wen Jiabao this week. Despite earlier indications that China's central bank was willing to relax the yuan's effective 16-month peg to the U.S. dollar, Mr. Hu carefully avoided any mention of the issue this weekend, instead attacking what he termed "unreasonable" trade restrictions on developing nations.
Underscoring the uncertainty, a final statement from APEC leaders omitted a reference to "market-oriented exchange rates" - included in an earlier draft version - because Chinese and U.S. negotiators could not agree on the wording. Chinese Vice Commerce Minister Chen Jian Sunday backed away from suggestions the central bank had signalled a policy shift on the yuan.
Though China has been under increasing pressure from the U.S. and its Asian neighbours to relax its currency policy, officials there have been loathe to do so for fear of dampening modest signs of recovery in its exports. "Economies around the world are beginning to grow again. And we are on the path to recovery," Mr. Obama said in remarks to APEC delivered before travelling to Shanghai last night.
"But we cannot return to the same cycles of boom and bust that led to this recession. We cannot follow the same policies that led to such imbalanced growth. If we do, we will continue to drift from crisis to crisis, a failed path that has already had devastating consequences for our citizens, our businesses, and our governments."
At the same time, China's growing clout as an economic power - it is the world's third-largest economy, on the way to becoming the second and the largest foreign owner of U.S. debt - has shifted the dynamic between the two countries toward one of equality. For instance, Chinese questions about how Washington spending policies will affect the already soaring U.S. deficit and the safety of Chinese investments now must be answered by Washington.
Chinese finance officials now appear to be hitting back against pressure on currency controls. In Beijing, the chairman of the China Banking Regulatory Commission Sunday blamed low U.S. interest rates and the decline of the dollar for "huge" speculation in foreign exchange trading.
"The continuous depreciation in the dollar, and the U.S. government's indication that, in order to resume growth and maintain public confidence, it basically won't raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation," Liu Mingkang told a finance forum. As a result, he said, this has "seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies."
The tensions have cast doubt on Mr. Obama's hopes for strengthening U.S. trade with China amid accusations of protectionist policies and dumping of goods on both sides.
He has described his China trip as having a "jobs agenda" and called on China to move beyond its current strategy of keeping the yuan low and its exports affordable to ensure that its impressive economic growth - now forecast to hit 8.4 per cent by year's end - continues beyond the present, massive levels of government spending to stimulate the economy.
"Chinese consumers … are ready to consume more. In some ways their consumption has been put on the backburner in the interest of export-led growth. That was an entirely legitimate strategy as they were trying to pull themselves out of very difficult economic times. As they become more confident, I think that they will be more interested in the kind of balanced growth that we think is achievable," Mr. Obama told Reuters late last week.
U.S. officials estimate 1.6 million American jobs are directly related to exports to Asia, thanks to its modest 9-per-cent share of Asia's trade. An increase to just 10 per cent would create another 250,000 to 300,000 jobs - essential as the U.S. unemployment rate grows, hitting 10.2 per cent last month.
Last month's U.S.-China Joint Commission on Commerce and Trade concluded 11 low-level trade deals including modest concessions from the U.S. on China's poultry exports, and from China on foreign components in wind-power equipment and U.S. pork imports. But beyond that modest progress, larger disputes over Chinese tires and U.S. car parts linger, feeding fears of a wider trade war.
"A lot of people are concerned about a wider trade war between the two countries," said Jiang Zhaokang, a Beijing-based international customs and trade lawyer who also heads the American Chamber of Commerce in China's trade and customs committee.
Mr. Jiang said, however, that both sides have so far restricted themselves to guarded responses to the other's actions. "Both governments understand the importance of the trade relationship between the two countries," he said.
Mr. Obama's events in China this week will be watched carefully in Canada, where officials are preparing for Prime Minister Stephen Harper's long-awaited first visit to China in early December. On Mr. Harper's agenda will be Chinese bans on imports of Canadian canola and pork products, as well as long-sought approved destination status for Chinese tourists to Canada.
Canadian firms with interests in China have long maintained that Mr. Harper's failure to visit China has affected trade ties. Though politicians have argued against this, Canada has so far failed to have the ban on its pork - imposed over concerns related to the H1N1 flu virus - lifted, while U.S. officials successfully negotiated an end to the ban during trade talks last month.
"Obama has rather carefully sent messages to the leadership that he wants a primordial economic focus in the relationship with China," said Peter Harder, a former deputy foreign affairs minister and now president of the Canada China Business Council. "I welcome Prime Minister Harper in hopefully not using this visit as a single visit, but as a token toward a long-term commitment to that kind of political relationship with the Chinese leadership."
With files from The Associated Press