Paulson Warns of Fallout Over Yuan
By: Bob Davis, the Wall Street Journal
BEIJING—Former U.S. Treasury Secretary Hank Paulson warned that a slower pace of yuan appreciation could produce political problems for China in the U.S., especially during an election year.
"It's in our interest and China's interest that China continues to reform the RMB and move to a market-determined" exchange rate said Mr. Paulson, referring to the yuan, which is also known as the renminbi, or RMB. A slowing of yuan appreciation "would be unfortunate for [China] and it would heighten tension with the U.S."
Since China said it would loosen the yuan's tie with the dollar in June 2010, the yuan has appreciated at an annual rate of 5% to 6% against the dollar. But since November 1, the yuan has been flat against the dollar.
Chinese officials have stressed that they remain committed to currency "flexibility." But market analysts in China say that with export growth sagging, Beijing will look to reduce the pace of yuan appreciation.
In currency trading on Monday, the yuan hit the low end of its trading band against the U.S. dollar for the fourth consecutive session as investors continued to seek the perceived safety of the U.S. currency amid growing worries over China's slowing economy and weakening exports. Even so, in those past four sessions, the yuan has appreciated 0.2% against the dollar due to the central bank's apparent efforts to prevent the yuan from falling too sharply, which could prompt the political problems Mr. Paulson warned against.
Mr. Paulson said that the combination of Congressional and presidential elections and a sour U.S. economy makes it "a dangerous time" in the U.S., where China could find itself blamed for U.S. economic problems.
He said a "market-determined" exchange rate is in China's interest because it acts as a kind of signal that China is serious about shifting its economic model so it relies more heavily on domestic demand and less on exports. The exchange rate becomes "a proxy for the rate and pace of reform," he said.
But Mr. Paulson said he didn't support pressuring China to boost its currency through punitive legislation of the kind that has passed the Senate and is being blocked thus far in the House by the Republican leadership. "That's the way to a trade war," he said.
Mr. Paulson was in Beijing for a seminar on urban development co-hosted by his new Paulson Institute, based in Chicago. He has a long history of working with Chinese officials, first at Goldman Sachs, where he rose to become chief executive, and then as Treasury secretary.
He said he thought Xi Jinping, who is expected to become China's president next year, would be a "strong leader." He is "clearly pragmatic," Mr. Paulson said and "understands what has been accomplished" through economic reform measures. However, Mr. Paulson said he didn't expect much movement on reform in China during the leadership transition.
Despite the ongoing tension between the U.S. and its trading partners, the nations are becoming more interdependent, the former Treasury secretary said.
"With the economic issues in the U.S. and the economic issues in Europe, the pressures on China are going to be greater," Mr. Paulson said. "The world is going to be more reliant on Chinese growth, and all those that are rooting against China had better be careful of what they're rooting for."