The Chinese renminbi could pose a threat to the international dominance of the US dollar within a decade, according to an independent commission set up by the US Congress.
The annual report of the US-China Economic and Security Review Commission, published on Wednesday, said China’s efforts to spread international use of its currency were succeeding in broadening its reach.
“[It] no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years,” said the commission, chaired by William Reinsch, president of the National Foreign Trade Council, a business group. “Chinese financial authorities are laying the groundwork for these ambitions via a series of bilateral arrangements with foreign companies and financial centres.”
The report also said China was continuing to intervene heavily in its domestic economy through a combination of subsidies and protections to state-owned enterprises, rules on forced transfer of technology from foreign investors and limiting government procurement to Chinese companies – the so-called indigenous innovation policy.
“Chinese officials including [President Hu Jintao] have pledged to modify China’s indigenous innovation policy in response to protests from US business leaders and top officials,” the report said. “These promises have not been implemented at the local and provincial levels, however.”
Over the past few years, Beijing has gradually relaxed controls on the use of the renminbi in international transactions, using Hong Kong as a test-bed for experimentation.
Considerable controls remain on cross-border capital flows, together with continued massive official intervention in foreign exchange markets to hold down the renminbi.
The Peterson Institute for International Economics, a Washington-based think-tank whose estimates of currency undervaluation are frequently cited as authoritative on Capitol Hill, said this week that the renminbi remained undervalued against its trading partners by only 11 per cent, compared with 16 per cent in April, thanks to modest appreciation and higher inflation in China.
But the institute said the renminbi was still 24 per cent undervalued against the dollar based on estimates of fundamental equilibrium exchange rates – currency values that would return economies roughly to current account balance if they were producing around their normal capacity.
Senior US administration officials, including Ron Kirk, trade representative, and John Bryson, commerce secretary, travel to China this weekend for bilateral talks under the annual joint commission on commerce and trade. Beijing has promised to make a revised offer before the end of 2011 to join the government procurement agreement, a pact within the World Trade Organisation to open public contracts to international tender.
The currency issue has risen back up the US political agenda. In October, the Senate passed a bill that would allow the US to impose retaliatory tariffs on Chinese imports in accordance with estimates of currency misalignment. But the Republican leadership of the House of Representatives, which opposes the move, has so far resisted bringing a similar bill to a vote.
By Alan Beattie
16 November 2011
@ Financial Times