US-China Currency Dispute 'No-One Is Going to Be Bought Off by a Tiny Revaluation'
SPIEGEL ONLINE: In the run-up to the G-20 summit, the Chinese government has let its currency, the renminbi, appreciate slightly against the dollar. The US has long been calling on Beijing to do just that, to ensure that Chinese exports are no longer artificially cheap. Is the new development just a calculated move to make sure this question is not on the agenda in Toronto, or a real change of heart?
Andrew Small: It doesn't look like a genuine change of heart on China's part -- expectations remain very modest for the actual level of revaluation. But Beijing is practiced at making concessions that are just enough to cool external pressure without really amounting to substantive policy shifts.
SPIEGEL ONLINE: What impact could this currency adjustment have on the US economy and the global recovery?
Small: It's hard to see it being enough to make a real difference -- estimates are still that the revaluation will be in the realm of 2-3 percent by the end of the year, which is hardly enough to make a major contribution towards rebalancing. Nevertheless, it could have been worse. After the euro crisis, few were expecting China to move before the G-20 meeting, so it's a welcome, if modest, step.
SPIEGEL ONLINE: Will this step be enough to mollify US lawmakers who are lobbying the Obama administration to get tougher on China with regard to trade issues?
Small: It will undercut some of the congressional pressure and it's hard to see really tough legislation being passed in a context where China is at least showing a spirit of compromise. Moreover, the Obama administration is going to believe that it's had at least a small win on the issue, and will be more willing to push back than it has been in recent weeks. But especially given the economic climate, the tension around the currency issue is not going to abate. Over time, no-one is going to be bought off by a tiny revaluation, so the game of pressure and response is likely to pick up again pretty quickly.
SPIEGEL ONLINE: Has Beijing accepted the notion that its export-driven approach is not sustainable?
Small: In principle, China accepted the notion that export-led growth is not sustainable some time ago. But it's been much harder to wean itself off that model - especially during a period when the global economic recovery is still fragile. We won't see anything approaching "balanced growth" until Beijing is convinced that it's completely out of the woods. It will involve a willingness to tolerate some attrition in the export sector and that willingness clearly isn't there yet.
SPIEGEL ONLINE: Nevertheless, could this first step be an indication that China is willing to become a more responsible player in global affairs -- both politically and economically?
Small: Beijing decided around the end of February that it wasn't willing to live with the level of deterioration in US-China relations. It knew that the two crucial moves that it needed to make to get things back on track were on Iranian sanctions and the currency issue. It has made concessions on both issues, but that does not represent some greater move towards responsibility on Beijing's part -- the goal is still very much to use China's stronger power position to ensure that it can concentrate on a relatively narrow set of domestically focused interests. But there's just very little appetite for trouble among China's leaders, so when external pressure -- especially from the United States -- achieves a certain scale on certain issues, it's willing to make modest moves.
SPIEGEL ONLINE: What does Beijing hope to get in return?
Small: So far, it hasn't really received concessions from the US side in return. What it gets is a somewhat warmer relationship and the absence of the needless and distracting crisis that was developing at the beginning of the year.
SPIEGEL ONLINE: Does Beijing still hope for a G-2, a world order dominated by China and the US?
Small: We have seen "G-2 moments" of sorts -- in Copenhagen, over the Iran deal and, to a more limited extent, on the currency issue, insofar as the crucial negotiations have ultimately been bilateral, between the United States and China. However, the results have been so characterized by the lowest common denominator that few on the US side really think this is a partnership model that is going to work to deliver useful outcomes. Although there may well be more decisive bilateral negotiations between the two sides -- that shut the Europeans and others out at important moments -- I expect that there will be more effort invested by the United States in lining up the right coalitions beforehand.