The warning came as the US election season combined with rising political instability in China to test the countries’ delicate relationship. “If we continue to beat China up on the phoney issue of its currency, we run the risk of shooting ourselves in the foot,” says Stephen Roach, the former non-executive chairman of Morgan Stanley Asia.
“It seems to me that the scale of this policy blunder is painfully reminiscent of the Great Depression in the 1930s.”
High-level US-China negotiations, under the purview of the Strategic Economic Dialogue, which begins in Beijing on Thursday, are a chance to “re-focus” US priorities towards liberalizing Chinese domestic markets for US manufacturers and service providers that are faced with weak domestic demand, he says.
Presumptive Republican presidential candidate Mitt Romney has vowed to formally brand China a currency manipulator on his first day in office, if elected, while US president Barack Obama has sounded the alarm over China’s exchange rate.
The political temperature has risen despite the fact the Chinese currency has appreciated by 31.4% against the dollar since mid-2005 and the decision by Beijing to widen its currency trading band by 0.5% to 1% on April 14, in a step towards a more market-based exchange-rate regime.
Last month, the International Monetary Fund (IMF) reduced its medium-term forecast of China’s current-account surplus, seen as a providing Beijing with diplomatic cover against attacks that the currency is undervalued.
Currency issue "bogus"
Roach, a senior fellow at Yale University, argues that the importance of expanding market access for US companies in China far “outweighed” the “bogus” currency issue. “The Sino-US relationship is deeply troubled and it reflects the unprecedented pressures in the US, such as employment and wage stresses, as well as misdirected policies in Washington,” he says.
The Morgan Stanley official argues that the US should press China to join the World Trade Organization’s government procurement agreement, possibly in return for granting greater access to US technology, which is subject to Cold War-era restrictions.
He warns that if Romney made good on his threat to label China a currency manipulator, tit-for-tat trade sanctions between both nations would kick in, which, in extremis, would reinforce the allure of Beijing’s “trump card” – dumping a portion of its huge holdings of US Treasuries.
Hung Tran, deputy managing director at the Institute of International Finance, and a former senior IMF official, says that recent political rhetoric from US politicians had “not been helpful” in deepening economic co-operation between Beijing and Washington.
“But growing trade between both nations suggest relations seem to be advancing in the right direction,” he says.
The talks come amid rising political instability in China, after the recent downfall of Bo Xilai, formerly seen as a rival to Xi Jinping, China’s presumed next leader. In addition, Chen Guangcheng, a Chinese activist, dramatically escaped house arrest this week, and sought refuge in the US embassy in Beijing.