Written by Laurence Brahm - Published by South China Morning Post on 04/05/2004

On March 26, China's central banker Zhou Xiaochuan. while visiting the international Monetary Fund, held a one-hour meeting with US Treasury Secretary John Snow, who pressed China for an upward revaluation of its currency.

Mr Snow called for China's foreign exchange regime be "more flexible" and for Beijing to drop 'unnecessary controls". A US Treasury Spokesman later emphasized Mr Snow's rhetoric about "free trade" and "free capital flows".

To push his point, Mr Snow will send China yet another high-powered delegation of financial experts “to explore a path for a floating foreign exchange regime.” Mr Zhou politely agreed to receive the delegation, but made it clear that China’s path is already set. “This is the American sides’ viewpoint,” he said. “China will continually try to perfect our system. It is complicated and involves working on a series of inter-related foundations. China’s principle and attitude towards changing our foreign exchange regime was stated clearly at the 16th party congress. Afterward, China, together with the G20 in Mexico [the World Trade Organization’s Cancun round] explained [this to the Americans], underlining every sentence to clarify our position. It is already clear.”

China has its own road map towards eventual foreign exchange convertibility, described as: “First capital inflow (meaning qualified foreign institutional investors), then capital outflow (meaning qualified domestic institutional investors, expected to begin by the end of the year); first direct investment, then securities investment; first the capital market, then the money market; first the stock market, then the bond market; first relax capital accounts, then foreign exchange convertibility.”

This provides a clear, pragmatic and executable program of steps towards convertibility. China’s policy makers are unlikely to be dissuaded from following through carefully considered process because of American election pressures.

Recent moves allowing Hong Kong banks to conduct yuan business represent another step: zoned convertibility. China spent two decades reforming its economy through controlled tests in specific regions, before going nationwide. Expect the road map to be followed.

Mr Zhou later emphasized that the question of revaluation was not directly discussed with Mr Snow, who instead called for a “free float.” China argues that the yuan is already a “managed float,” traded daily on China’s inter-bank daily in Shanghai. Mr Zhou pointed out to Mr Snow that it is natural and common for any country to spend US dollars on the market to buy its own currency in order to maintain a preferred level of exchange rate. Japan does it, and like Japan, China has the foreign exchange reserves to afford this.

China’s trade surplus and bulging foreign exchange reserves of US$400 billion are not factors stimulating debate on this particular issue, either. Revaluing the currency will not save any US jobs. Rather, this is a unilateral issue created by President George W. Bush for US domestic voter consumption, for which the Treasury Department does his bidding. Three factors will drive the extent to which pressure continues: US unemployment figures, White House perceptions of whether China will budge and the continued crisis in Iraq, Afghanistan and North Korea, which leaves Mr Bush needing allies like China.

But because of repeated pressure from the US, businessmen and financiers keep asking when the yuan will be revalued upwards. During the Asian financial crisis, analysts predicted the yuan would devalue. China’s central bank told them it would not. It did not.

Since last year everyone has been talking about “hot money” flowing into China. Up to January 13, US$1.2 trillion had entered China’s A-share market, with UBS First Boston leading the back placing US$600 million, followed by Morgan Stanley (US$300 million), Citicorp and Deutschbank (US$200 million), and HSBC (US$100 million).

Policymakers in Beijing have indicated that an upward revaluation is not on their agenda this year. China has undergone a long and painful march toward currency convertibility, with the ultimate goal of integration into the world financial and trading community. This will assure China’s economic growth and future more than anything else.

The current leadership is acutely sensitive to friction points in China’s economy and is not willing to sacrifice the track China is on for whims of an American election. This time, place bets carefully.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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