Hu Says U.S. Must Respect China Sovereignty, Rejecting Push for Yuan Gains

Chinese President Hu Jintao said greater cooperation with the U.S. on economic and security issues must include recognition of each nation’s sovereign rights as he rejected American arguments for yuan appreciation.

Hu, who will arrive in Washington tomorrow for a state visit, said the two nations should abandon the “zero-sum Cold War mentality.” He cited trade, energy and terrorism as areas for strengthening cooperation, according to a transcript of answers to written questions from the Wall Street Journal and the Washington Post.

“We should respect each other’s sovereignty, territorial integrity and development interests,” Hu said. Inflation can’t be the “main factor” in determining yuan gains, he said, after U.S. Treasury Secretary Timothy F. Geithner said Jan. 12 that higher prices in China will lead to “necessary” exchange rate adjustments.

Allegations of unfair Chinese treatment of foreign companies, the awarding of the Nobel Peace Prize to jailed dissident Liu Xiaobo and China’s refusal to condemn North Korea’s shelling of a South Korean island have been sources of tension since President Barack Obama visited China in 2009.

“The biggest achievement for this trip will be a strengthening of mutual trust and setting a tone for future strategic development,” said Liu Qin, a researcher at the China Institute on International Studies in Beijing. “This visit serves as a connection point for the next generation of Chinese leaders and will lay a solid foundation for the next 10 years.”

Congressional Meetings

Hu’s visit from Jan. 18-21 will include meetings with members of the U.S. Congress and a visit to Chicago. Chinese Commerce Minister Chen Deming and Lou Jiwei, chairman of the nation’s sovereign-wealth fund, will accompany Hu.

In response to the newspapers’ questions, Hu said China had adopted a “package plan” to curb inflation, including interest-rate adjustments. On Jan. 14, the central bank ordered lenders to set aside more deposits as reserves for the fourth time in three months, draining cash from the economy to cool price pressures. Hu said that the increase in the cost of living is “on the whole moderate and controllable.”

Prices are climbing faster in China than in the U.S., making Chinese goods less competitive, Geithner said last week. Speaking in Washington on Jan. 12, he said that while the yuan was still substantially undervalued, the “fundamental forces that are pushing Chinese productivity growth and are pushing inflation higher will bring about the necessary adjustment in exchange rates.”

The yuan fell for the first day in five today, trading at 6.5950 per dollar as of 10:48 a.m. in Shanghai.

Dollar’s Role

The dollar’s primacy as a reserve currency and in trade is “the product of the past,” Hu told the newspapers. He pointed to China’s effort to expand the role of the yuan in cross-border trading and investment, while acknowledging a “fairly long” road to making it a fully fledged international currency.

U.S. lawmakers argue that an undervalued yuan hurts American manufacturers and widens the trade deficit with China by holding down the price of exported Chinese goods.

While “there are some differences and sensitive issues” between the two countries, Hu said, “we both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

In an allusion to the Federal Reserve’s policy of buying $600 billion of Treasuries to stimulate the economy, Hu told the newspapers that U.S. monetary policy has a “major” impact on global liquidity and on capital flows.

Foreign Investment

Hu pledged to continue to improve laws and regulations concerning foreign investment, and to offer a stable and transparent legal and policy environment. U.S. companies’ “innovation, production and business operations in China enjoy the same treatment as Chinese enterprises,” he said.

China will continue to develop a “socialist democracy,” the Chinese president said. He called for an “increased dialogue and contact” with the U.S. and said the countries should “respect each other’s choice of development path.”

Hu answered only some of the questions submitted by the newspapers, not addressing one about Nobel Peace Prize winner Liu and another on China’s growing naval power, among others, according to the Journal.

China has “made relentless efforts to help ease the tension” between South Korea and North Korea and “pays a great deal of attention to the Korean nuclear issue,” he said. China stands “for achieving denuclearization of the peninsula in a peaceful way through dialogue and consultation to maintain peace and stability of the peninsula and Northeast Asia,” the president added.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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