Mr. Hu Goes to Washington

| About: WisdomTree Chinese (CYB)

Chinese President Hu Jintao will hop on a plane tomorrow and arrive in Washington on Wednesday to talk to U.S. President Barack Obama about a number of issues, most of which will, in some way or another, be related to the value of the yuan.

After making a barrage of announcements in recent weeks about further liberalizing trading in the Chinese currency, small steps on the road to it becoming freely convertible sometime this decade (maybe), the tightly controlled yuan reached a new all-time high against the dollar last week as it often does prior to Chinese officials meeting with important heads of state who, almost unanimously, think the currency is undervalued.

So, given all this recent good will, it comes as something of a surprise that the media-shy Hu would take this opportunity to respond to questions posed by U.S. newspapers in which he characterized the current dollar-based global monetary system as a sort of relic of a bygone era. Well, those werent’ his exact words… Here’s the relevant Q&A as it appeared($) in the Wall Street Journal today and this related WSJ story is worth a look as well.

4. What do you think will be the U.S. dollar’s future role in the world? How do you see the issue of making the RMB an international currency? Some think that RMB appreciation may curb China’s inflation, what’s your view on that?

A: The current international currency system is the product of the past. As a major reserve currency, the U.S. dollar is used in considerable amount of global trade in commodities as well as in most of the investment and financial transactions. The monetary policy of the United States 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.

It takes a long time for a country’s currency to be widely accepted in the world. China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development. But making the RMB an international currency will be a fairly long process. The ongoing pilot programs for RMB settlement of cross-border trade and investment transactions are a concrete step that China has taken to respond to the international financial crisis, with the purpose of promoting trade and investment facilitation. They fit in well with market demand as evidenced by the rapidly expanding scale of these transactions.

China has adopted a package plan to curb inflation, including interest rate adjustment. We have adopted a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Changes in exchange rate are a result of multiple factors, including the balance of international payment and market supply and demand. In this sense, inflation can hardly be the main factor in determining the exchange rate policy.

It looks like Hu and Obama might have more to talk about than originally planned as, in addition to the idea that the U.S. dollar system is antiquated, that last highlight about inflation and exchange rates would appear to contradict the many inflation fighting benefits that a stronger Chinese currency would produce, as espoused by U.S. Treasury Secretary Tim Geithner in recent days.