China faced important negotiations over the yuan in coming weeks, US Ambassador Jon Huntsman said, adding that Washington was not alone in wanting Beijing to unshackle its currency from a 20-month-old peg against the dollar.
"We hope to see more flexibility on the exchange rate," Huntsman told an audience of students at Tsinghua University, an elite school in Beijing.
"I would be misleading you if I left you with the impression that this wasn't a very, very important issue in the United States, and will continue to be. We'll see how the next few weeks play out," he said.
The currency debate has turned acrimonious, with 130 US lawmakers demanding sanctions unless China gives up what they see as an unfair competitive advantage by allowing the yuan to rise.
A semiannual US Treasury report due in mid-April could label China a "currency manipulator,” adding to pressure on Beijing and threatening a deepening rift between the world's biggest and third biggest economies.
"I suspect there will be many important negotiations in the weeks ahead. This is of real concern to people in my country," Huntsman said. "Many see the trading relationship with China as a little out of balance, partially because of the currency issue."
He declined to elaborate on the nature of the talks but said the United States was not alone in wanting a stronger yuan. China has kept the currency on ice near 6.83 per dollar since mid-2008 to help its exporters ride out the global credit crunch.
"My Chinese friends like to pitch this as just an American issue. I like to say that there are many countries that feel the same way," he said.
Dominique Strauss-Kahn, the managing director of the International Monetary Fund, on Wednesday restated the fund's long-held view that the yuan was undervalued.
Chinese officials have given no ground, saying they will not waver in sticking to a stable exchange rate while asserting that their nation is being made a "scapegoat" for the United States' own economic woes ahead of Congressional mid-term elections.
Qin Gang, a Foreign Ministry spokesman, said US demands for a stronger yuan were unfair and harmful to Sino-American ties.
Resolving such trade frictions "requires that both sides be calm and rational,” Qin told a regular briefing on Thursday.
A stronger yuan would spell the end for many Chinese exporters in labor-intensive sectors such as garments and furniture, a semi-official trade group said.
"If the yuan rises, these companies will face the immediate risk of going bust as their profit margin is already very narrow," said Zhang Wei, vice-chairman of the China Council for the Promotion of International Trade.
"So for these companies, the consequences would be disastrous," he told a news conference.
While external pressure on China to push up the yuan is intense, domestic pressure to hold the currency down is even greater, said Zhang, whose members include the country's biggest exporters.
He said his group was checking with more than 1,000 exporters on whether they could cope with a stronger exchange rate.
Glenn Maguire, chief Asian economist for Societe Generale in Hong Kong, said the stress tests were an indication that, despite its official rhetoric, Beijing was paving the way for what was likely to be a 5-10 percent revaluation of the yuan next quarter.
But he warned that too much pressure from the United States could prompt China to dig its heels in.
"The moves by 130 US Congressmen to pressure US President Obama to label China a 'currency manipulator' could yet prove to be one of the most spectacular political misjudgements of all time," Maguire said in a note.
Under US law, designation of China as a "currency manipulator" would require the Treasury to begin "expedited" negotiations with Beijing to adjust its currency.
Several branches of the Chinese government, including the ministries of commerce and industry, conducted similar currency stress tests last month.
A government source familiar with one of the field trips to China's coastal exporting hubs said the mission came back unconvinced that the pros of a stronger yuan would outweigh the cons because of the razor-thin margins that Zhang mentioned.
"But having said that, we found that these companies are quite flexible in adapting to new market conditions," he said.
Because they can make a steady profit on their current margins, thanks to high volumes, they have little incentive to move up the value chain, the source added.
"So yuan appreciation would be a nice catalyst to force these firms to change for the better, which is also what the government wants to see," he said. "It's true that jobs are a major concern. But we're also seeing labor shortages in many places. So I think it should be manageable."
The source said arm-twisting by US lawmakers was counter-productive.
"The last thing China will do is be seen bowing to foreign pressure, even if it's the right thing to do. The Americans should keep quiet and not lecture the Chinese. Once it's left alone, China is quite likely to move on the yuan," he said.
