No Thaw Looming in U.S./China Relations

The U.S. political pressure on China will heat up in the coming weeks.

The pressure will likely culminate in May with the U.S. Treasury formally citing China as a manipulator in the currency market, and in the mean time, anticipation of further appreciation of China's renminbi is likely to help underpin other currencies in the region and help draw investment into the regional equity markets.

Ironically, but not coincidently, the heightened pressure that will be brought to bear on China will take place as the renminbi's appreciation has accelerated. In the first couple months after the revaluation and shift to a basket approach, the yuan hardly moved against the dollar -- from November 2005 through January 2006 -- the dollar fell about 0.1 renminbi a month. The pace doubled in February and quickened further in March with roughly a 0.3 renminbi move since the middle of the month.

That said, one needs to keep the renminbi's advance in perspective. It appreciated a largely inconsequential 0.66% against the U.S. dollar in the first quarter. Although this is more than the 0.18% the Japanese yen appreciated, it pales in comparison to the appreciation of other currencies in the region, like Indonesia's rupiah's 8.4% gain, the Thai bhat's 5.6% gain, and the Philippine peso and South Korean won's 4% appreciation. But not only has China gained currency competitiveness against its regional trading partners, unlike the second half of 2005, the renminbi lost ground against the European currencies, including the euro and British pound.

The fact that the renminbi has depreciated against most currencies in the first quarter, despite its minor appreciation against the dollar, may encourage others to support the pressure the U.S. is exerting.

There are many international forums in the coming weeks and each will likely see the issue of China's integration in the world economy being discussed. This week will likely see more official rhetoric and positioning ahead of a number of events later in the month, beginning the following week.

Kicking Off in Vienna

The first such event is a central bankers' meeting in Vienna on April 8-9. This deputy finance ministers and sherpas' meeting will lay the groundwork for the formal G-8 meeting later in the month.