U.S., China Highlight Moves on Yuan, Investment Pact

The U.S. and China completed talks by highlighting pledges on the yuan’s exchange rate and progress on a bilateral investment pact, as officials sought common ground amid cyberspying and maritime tensions.

China committed to reduce currency intervention as conditions allow, according to a joint statement yesterday after the two-day Strategic and Economic Dialogue in Beijing, a move U.S. Treasury Secretary Jacob J. Lew called a “big change.” Lew and Chinese Vice Finance Minister Zhu Guangyao cited significant progress toward the investment treaty.

Any gains were incremental, since China’s pledge on the yuan is in line with existing government and central bank policy, while Zhu said that difficulties remain in reaching an investment pact. The nations are at odds over issues including alleged cyberspying and any U.S. role in Asian maritime disputes.

“The only major tangible fruit of this round of the SED may be -- although time will tell -- that it could stop the downward spiral in the bilateral relationship and make progress towards better mutual understanding and future accords,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole SA in Hong Kong.

The comments about China reducing intervention in the yuan were “nothing new,” Kowalczyk said.

Securities Industry

The joint U.S.-China statement also said China will push forward the opening of the securities industry and study additional opening in banking. The U.S. and China welcome investors and qualified financial firms to take part in each other’s local government bond markets, according to the statement.

The annual talks covered security and strategic issues as well. The U.S. and China agreed on the “importance and urgency of achieving a denuclearized, stable Korean peninsula,” Secretary of State John Kerry said yesterday. China understands there is more that can be done to bring North Korea into compliance with its obligations as the two nations discussed “specific ways” to work toward a peninsula free of nuclear weapons, Kerry said.

Kerry said the U.S. and China had a “frank exchange” about cyber issues, though China withdrew from a cybersecurity working group in May after the U.S. indicted five Chinese military officers for allegedly hacking American companies. He said the U.S. was investigating an attempted cyberattack that the New York Times reported had originated from China and targeted the U.S. Office of Personnel Management.

Competition Level

“The dialog will continue, but I just don’t know if anything concrete can come out of it when the level of competition between the United States and China seems to be rising, not declining,” said George Magnus, an independent economic adviser in London to UBS AG. “On the really big issues there is more scope for tensions than on exploiting synergies.”

The two sides said China is making “technical preparations” with the International Monetary Fund so that the country is in line with global standards for releasing economic data such as intervention in currency markets.

China widened daily trading limits on the yuan in March and the central bank said in November it would eventually end normal intervention in the market. The People’s Bank of China will reduce its intervention in the yuan’s exchange rate “when conditions are ready,” Governor Zhou Xiaochuan said yesterday, adding that “after the global financial crisis, international markets are not very calm with frequent problems.”

Lew has said he asks Chinese officials about the yuan every time he meets them. He wants China to be more transparent when it intervenes to weaken the yuan and to move to an exchange rate that lets investors determine the currency’s value.

Moving Fast

Vice Premier Wang Yang said July 9 that if China moves too fast on opening up and on exchange-rate reform, it may make “fundamental mistakes,” while moving too slowly would affect the policy process in China.

“So how to move at the right pace is something that we must manage well in our reform process,” Wang said at a meeting with U.S. officials including Lew.

The U.S. and China said they would try to “reach agreement on core issues” by the end of this year on the investment treaty they agreed to negotiate last year in Washington. They also committed to starting negotiations in early 2015 on what can be excluded from the deal. Lew complained last week that China wasn’t making enough progress on their side of the agreement.

Managing Relations

The dialogue “is not set up for solving specific problems” and is becoming more of a mechanism for leaders to have discussions and manage U.S.-China relations, said Niu Jun, professor at Peking University’s School of International Studies. “There are meetings to solve everyday, urgent or specific matters. This dialogue is not for that.”

Niu said that while the media see U.S.-China strains as severe, relations between the U.S. and China are “much better” than they were in the 1990s.

Some U.S. lawmakers, including Senator Charles Schumer, a New York Democrat, and Jeff Sessions, an Alabama Republican, have said the administration should label China a currency manipulator, something the Treasury Department hasn’t done in its twice-annual foreign-exchange report since 1994.

By keeping the value of the currency artificially low, China puts U.S. businesses at a disadvantage in the global marketplace, according to Schumer and Sessions.

Schumer and another Democratic senator, Pennsylvania’s Bob Casey, said this week they had sent Lew a letter saying the Obama administration’s efforts have been insufficient in dealing with China’s currency manipulation.

— With assistance by Ian Katz, Sangwon Yoon, and Xin Zhou

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