Factbox: China, U.S. spar over value of the yuan

(BestGrowthStock) – President Barack Obama vowed on Wednesday to address currency rates with economic partners such as China and to get tougher with them on trade to ensure that U.S. goods do not face a competitive disadvantage.

Sino-U.S. relations are already troubled by Washington’s planned arms sales to Taiwan, a likely meeting between Obama and exiled Tibetan spiritual leader the Dalai Lama, and a spat over Internet freedoms.

Here are some facts about the main points of contention over the yuan:

* The United States complains that China keeps its currency artificially undervalued, thus unfairly helping exporters.

China has held the yuan in a de facto peg to the dollar since the worsening of the global financial crisis in mid-2008, meaning its currency has weakened against those of other trade partners as the value of the dollar has slid over the past year.

* China has repeatedly said that its currency policy has been an important source of stability during a period of international financial turmoil, benefiting both the Chinese and global economic recovery.

* During the most intense phase of the financial crisis, from September 2008 to March 2009, the dollar peg actually meant that the yuan appreciated strongly against virtually all other currencies in the world.

* Obama, during a visit to China last November, urged the country to let the yuan rise in value, but Chinese President Hu Jintao avoided mentioning either the yuan or the dollar during a joint appearance before the press.

* It’s not only the United States pressing China on the yuan. Top European officials have asked China to let the yuan resume its rise. The International Monetary Fund and some large developing countries, including Brazil and India, have also urged Beijing to get a move on.

* Concern about an overheating economy was the catalyst for Beijing’s landmark yuan reform in July 2005, when the central bank revalued the yuan by 2.1 percent, breaking a decade-long dollar peg. It let the yuan rise by a further 19 percent over the next three years before freezing it in place again in mid-2008 when the financial crisis began to hit Chinese exports.

* Analysts polled by Reuters and investors in the key offshore non-deliverable forward market expect the yuan to resume appreciation in the next 12 months, gaining about 3 percent. The main driver is expected to be domestic concerns about rising inflation, not foreign pressure.

* Yuan weakness is far from the only reason for China’s massive trade surplus with the United States. Economists often describe China’s surplus as structural, referring to the country’s cheap capital and over-investment, which generate excess production that is cleared through exports.

The implication is that deeper reforms to China’s economy (Read more about the fastest growing economy.) such as building up a social safety net, and not just yuan appreciation, are necessary to stimulate domestic demand and rein in its yawning trade surplus.

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(Writing by Ben Blanchard; Editing by Simon Rabinovitch)

Factbox: China, U.S. spar over value of the yuan