China Says the End of the Dollar is Near

By ANDREW BROWNE

BEIJING—Chinese President Hu Jintao emphasized the need for cooperation with the U.S. in areas from new energy to space ahead of his visit to Washington this week, but he called the present U.S. dollar-dominated currency system a "product of the past" and highlighted moves to turn the yuan into a global currency.
"We both stand to gain from a sound China-U.S. relationship, and lose from confrontation," Mr. Hu said in written answers to questions from The Wall Street Journal and the Washington Post.
Mr. Hu acknowledged "some differences and sensitive issues between us," but his tone was generally compromising, and he avoided specific mention of some of the controversial issues that have dogged relations with the U.S. over the past year or so—including U.S. arms sales to Taiwan that led to a freeze in military relations between the world's sole superpower and its rising Asian rival..

On the economic front, Mr. Hu played down one of the main U.S. arguments for why China should appreciate its currency—that it will help China tame inflation. That is likely to disappoint Washington, which accuses China of unfairly boosting its exports by undervaluing the yuan, making its products cheaper overseas. The topic is expected to be high on U.S. President Barack Obama's agenda when he meets Mr. Hu at the White House on Wednesday.
Mr. Hu also offered a veiled criticism of efforts by the U.S. Federal Reserve to stimulate growth through huge bond purchases to keep down long-term interest rates, a strategy that China has loudly complained about in the past as fueling inflation in emerging economies, including its own. He said that U.S. monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

Mr. Hu's responses reflect a China that has grown more confident in recent years—especially in the wake of the global financial crisis, from which it emerged relatively unscathed.

Mr. Hu reiterated China's belief that the crisis reflected "the absence of regulation in financial innovation" and the failure of international financial institutions "to fully reflect the changing status of developing countries in the world economy and finance." He called for an international financial system that is more "fair, just, inclusive and well-managed."
Mr. Hu, who also heads China's ruling Communist Party, rarely interacts with the international media. The Wall Street Journal submitted a series of questions to China's Foreign Ministry for Mr. Hu to answer. The Washington Post also submitted questions. The Foreign Ministry supplied Mr. Hu's responses to seven questions—but did not address questions about imprisoned Nobel Peace Prize winner Liu Xiaobo, China's growing naval power and complaints about alleged Chinese cyberattacks, among others.
Mr. Hu's veiled criticism of the Fed reflects widespread feelings among developing nations that U.S. interest-rate policy is devaluing the dollar, prompting flows of capital overseas and creating inflation elsewhere. China and other developing countries would like the Fed to factor in those consequences when it makes decisions. Fed officials counter that their mandate is to bolster the U.S. economy and that a stronger U.S. economy is in the interests of China and other countries, which depend heavily on trade and investment from the U.S.
This could be a major issue of contention between Messrs. Hu and Obama. The U.S. blames Chinese currency undervaluation—not Fed policy making—for worsening competitive and inflation problems overseas.

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Some of Mr. Hu's most significant comments dealt with the future of the dollar and currency exchange rates.
"The current international currency system is the product of the past," he said, noting the primacy of the U.S. dollar as a reserve currency and its use in international trade and investment.
The comment is the latest sign that the dollar's future continues to concern the most senior levels of the Chinese government. Beijing fears not only that loose U.S. monetary policy is fueling inflation, but that it will erode the value of China's holdings of dollars within its vast foreign-exchange reserves, which reached $2.85 trillion at the end of 2010.
China's central bank governor, Zhou Xiaochuan, created an international stir in March 2009 by calling for the creation of a new synthetic reserve currency as an alternative to the dollar. Mr. Hu's comments add to the sense that China intends to challenge the post-World War II financial order largely created by the U.S. and dominated by the dollar.
Mr. Hu called attention to China's accelerating effort to expand the role of its own currency, describing recent moves to allow greater use of the yuan in cross-border trade and investment—while acknowledging that making it a fully fledged international currency "will be a fairly long process."
China's moves already have spawned a thriving market for offshore trading of yuan in Hong Kong, and are widely seen as first steps toward making the yuan an international currency in line with China's new prominence as the world's second largest economy. Mr. Hu offered an enthusiastic endorsement of what are officially described as currency "pilot programs." They "fit in well with market demand as evidenced by the rapidly expanding scale of these transactions," he said.
Mr. Hu didn't signal any changes on the most sensitive aspect of China's currency policy: the exchange rate.

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Last week, U.S. Treasury Secretary Timothy Geithner reiterated the U.S. position that a stronger yuan is in China's own best interests, because it would help tame rising inflation that has become a key risk to China's rapid growth, which is underpinning the global economic recovery. A stronger yuan would reduce the price of imports in local-currency terms.
But Mr. Hu shrugged off the U.S. argument, saying that China is fighting inflation with a whole package of policies, including interest-rate increases, and "inflation can hardly be the main factor in determining the exchange rate policy."
Further, Mr. Hu suggested that inflation was not a big worry, saying prices were "on the whole moderate and controllable." He added: "We have the confidence, conditions and ability to stabilize the overall price level."
The U.S. argues that the yuan's real exchange rate—that is, the exchange rate as adjusted for the higher inflation level in China than the U.S.—is rising at a 10% annual rate. Treasury officials have argued to China that its policy options are limited—either it can boost the exchange rate to fight inflation, or inflation will effectively boost the value of China's currency.
While the U.S. says some Chinese economic officials buy that argument, it hasn't been widely adopted within China, as Mr. Hu's comments illustrate. But the U.S. feels that economics and time are on its side. Even so, the administration and Congress will continue to press China to boost the pace of its currency appreciation.