Reposted from the Wall Street Journal

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US Treasury’s Brainard: Hope For More Yuan Adjustment

WASHINGTON - China’s currency-adjustment process is “incomplete” despite a 40% appreciation in the yuan against the dollar since 2005, but the dynamics of the country’s evolving economy will likely propel further currency and other economic-policy reforms, a senior U.S. Treasury official said Tuesday.

Undersecretary for International Affairs Lael Brainard said she is hopeful that, given China’s widening of the yuan’s trading band, less currency intervention and slower foreign-exchange reserve accumulation, Beijing will complete a currency-adjustment process that has the exchange rate fully reflect market fundamentals.

While some economists have said that, by some measures, the yuan could be near market-determined rates, others have said that significant appreciation is still needed to equalize the yuan’s value. Since June 2010, when Beijing restarted its yuan appreciation, the currency has risen by only around 13% against the dollar. The International Monetary Fund has said it is still too early to say whether it can upgrade its current assessment of the yuan as “substantially undervalued.”

The Treasury official was speaking to the Washington International Trade Association after returning from the U.S.-China Strategic and Economic Dialogue in Beijing last week. Brainard also said that renewed pushes in recent months on a number of economic policies, including deepening financial markets and encouraging more domestic consumption, appear to signal that policies may extend beyond a major leadership transition in China next year.

“As [the Chinese] move forward on a number of these areas that we have put a large emphasis on, there is, I think, a self-reinforcing momentum to have market forces determine how capital is allocated, how exchange rates adjust,” Brainard said.

China is facing “an extraordinarily steep demographic cliff which will change fundamentally some of the advantages that they enjoyed in the previous decades,” including rising wages and costs, Brainard said.

“The model of undercutting in export markets on the basis of price is no longer going to serve China,” she said.

This is particularly true as Beijing is facing competitors that are lower cost and as it has large over-investments in some resource-intense industries, she said. One of the chief complaints among many U.S. businesses is the subsidy of Chinese companies, including through state-funded enterprises.

“China’s leaders and people recognize that they have an environment that is quite deficient when it comes to…encouraging innovation and they are going to need to move in a direction of higher value and more innovation, more domestic consumption and less reliance on a tapped-out European consumer,” Brainard said. “These changes…could be good for China and good for the rest of the world,” she said.

Brainard said new rules that the U.S. and China aim to negotiate by 2014 for export credits should be as strong as a deal among member countries in the Organization for Economic Cooperation and Development.

Ian Talley  |  May 8, 2012  |  Wall Street Journal