Goldman's O'Neill Says China, U.S. in `Grand Bargain' on Yuan

China is accelerating the yuan’s appreciation as part of the “grand bargain” to win U.S. support for Beijing to gain a bigger say at the International Monetary Fund, says Goldman Sachs Asset Management’s Jim O’Neill.

China’s yuan, known as the renminbi, reached the strongest level against the dollar since 1993 ahead of a Group of 20 leaders meeting this week in Seoul. The gain came after the IMF’s executive board approved a plan that would make China the third-strongest member in the organization, a position described by the fund’s chief Dominique Strauss-Kahn as allowing Beijing to take more “responsibility” in the global economy.

“People forget, but the currency has risen by 3 percent since the summer and has risen nearly 25 percent over five years,” said O’Neill, chairman of Goldman Sachs Asset, in an interview on Bloomberg Television. It’s not a “fluke” that China is given a bigger share at the Washington-based IMF, and “that’s part of the grand bargain,” he said.

O’Neill, who was returning from a nine-day trip to Asia, including China, also said it’s “ridiculous” to claim that countries around the world are engaging in a “currency war.” Brazil’s Finance Minister Guido Mantega used the “war” term in September to complain that countries from the U.S., China to Japan are pushing to weaken their currencies to gain an export edge.

“The whole currency war thing is ridiculous,” said O’Neill. “A true currency war will surely be one where the U.S. bought renminbi. I know this is a great term for people in the media, but it doesn’t really make sense to me at all.”

Yuan High

The yuan rose as much as 0.2 percent to 6.6330 a dollar today, the strongest level since China unified official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trading System. The yuan will rise faster than the 3 percent traders are betting on in the non-deliverable forwards, according to O’Neill.

Acting on an Oct. 23 deal by finance chiefs of the G-20 nations, the IMF agreed last week to shift more than 6 percent of voting rights to developing countries, while weakening the clout of European members including Belgium and Germany. The plan “may have an influence on the behavior of the Chinese authorities,” Managing Director Strauss-Kahn told reporters in Washington on Nov. 6.

No Banking Crisis

O’Neill, 53, created the BRICs acronym in 2001 to describe the rising power of large emerging markets in Brazil, Russia, India and China. He was named chairman of Goldman Sachs Asset Management in September after working as the co-head of global economics research and chief currency economist at Goldman Sachs Group Inc. since 1995.

In the interview, O’Neill also rebuffed speculation that China may have a banking crisis as the government boosts lending to stimulate growth during the financial crisis. Harvard University professor Kenneth Rogoff said in July China’s property market had begun a “collapse” that would hit the nation’s banking system. Fund managers including James Chanos and Marc Faber also have warned of a crash if a property bubble isn’t averted.

“People in New York seem to be worried about some kind of Chinese bank crisis,” said O’Neill. “That’s just naïve. The Chinese government owns the Chinese banks. Every time I go, I keep searching for all these things that could go wrong especially because people are telling me every week. But I didn’t see much of it.”

China is moving to reduce its current account surplus in the share of its economy, a move that the U.S. Treasury endorses, said O’Neill. It is the U.S. lawmakers who are intensifying the tension between the two countries, he added.

The House of Representatives on Sept. 29 passed a bill to let U.S. companies impose punitive duties on Chinese products to compensate for a weak yuan.

“The relations between the Treasury and China are very good,” said O’Neill. “The problem is something called Congress. The U.S. politicians need to understand that there’s plenty of scope for another big guy on the block as well as themselves.”

To contact the reporters on this story: Sara Eisen in New York at seisen2@bloomberg.net Ye Xie in New York at yxie6@bloomberg.net;

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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