Chinese President Hu Jintao highlighted moves to turn the "yuan" into a Global Currency

Chinese President Hu Jintao Highlights Need for U.S.-China Cooperation, Questions Dollar

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.

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.
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.
Mr. Hu renewed a Chinese pledge to offer a level playing field in China for U.S. companies, which have complained about aggressive Chinese moves to usurp their technology and shut them out of massive government-procurement contracts.

"All foreign companies registered in China are Chinese enterprises," Mr. Hu said, responding to concerns that China discriminates in government procurement against foreign businesses as part of its drive to encourage so-called indigenous innovation.

He added: "Their innovation, production and business operations in China enjoy the same treatment as Chinese enterprises."

The U.S. has been pressing China to revamp its plans for indigenous innovation, which foreign companies say put them at a disadvantage in competition with China's state-owned firms, which limits the types of government development projects and requires that companies get government approval to participate. China has pledged to join the World Trade Organization's government procurement agreement, which limits a country's ability to discriminate. But the U.S. and other countries say that so far China's WTO offer is inadequate because it exempts provinces, municipalities and state-owned enterprises. Last month China pledged to amend a buy-Chinese provision. During the Hu visit, the U.S. hopes to see some other commitments on this front from China.

Mr. Hu began his answers with a relatively upbeat assessment of China-U.S. relations, which he said had "on the whole enjoyed steady growth" since the start of this century.

He spoke of expanding cooperation from economy and trade into new areas like energy, infrastructure development and aviation and space. "We should abandon the zero-sum Cold War mentality," he said, and "respect each other's choice of development path."

On the diplomatic front, Mr. Hu entirely glossed over what has been one of the most dramatic developments of the past year—a series of disputes between a more assertive China and its neighbors that has given the U.S. an opening to shore up its relations with a part of the world that felt neglected by Washington while it fought wars in Iraq and Afghanistan.

In the past year, China has feuded with Japan over the seizure of a Chinese fishing boat and its crew off disputed islands; opened deep differences with South Korea because of its subdued response to military provocations by North Korea; and alarmed countries in Southeast Asia by declaring the South China Sea and its energy and mineral riches one of its "core interests."

"Mutual trust between China and other countries in this region has deepened in our common response to tough challenges, and our cooperation has continuously expanded in our pursuit of mutual benefit and win-win outcomes," Mr. Hu said, ignoring the regional turmoil.


—Jason Dean in Beijing
and Bob Davis in Washington
contributed to this article. 

We’re No. 1(1)!

We’re No. 1(1)!

By THOMAS L. FRIEDMAN

I want to share a couple of articles I recently came across that, I believe, speak to the core of what ails America today but is too little discussed. The first was in Newsweek under the ironic headline “We’re No. 11!” The piece, by Michael Hirsh, went on to say: “Has the United States lost its oomph as a superpower? Even President Obama isn’t immune from the gloom. ‘Americans won’t settle for No. 2!’ Obama shouted at one political rally in early August. How about No. 11? That’s where the U.S.A. ranks in Newsweek’s list of the 100 best countries in the world, not even in the top 10.”

Thomas L. Friedman

The second piece, which could have been called “Why We’re No. 11,” was by the Washington Post economics columnist Robert Samuelson. Why, he asked, have we spent so much money on school reform in America and have so little to show for it in terms of scalable solutions that produce better student test scores? Maybe, he answered, it is not just because of bad teachers, weak principals or selfish unions.

“The larger cause of failure is almost unmentionable: shrunken student motivation,” wrote Samuelson. “Students, after all, have to do the work. If they aren’t motivated, even capable teachers may fail. Motivation comes from many sources: curiosity and ambition; parental expectations; the desire to get into a ‘good’ college; inspiring or intimidating teachers; peer pressure. The unstated assumption of much school ‘reform’ is that if students aren’t motivated, it’s mainly the fault of schools and teachers.” Wrong, he said. “Motivation is weak because more students (of all races and economic classes, let it be added) don’t like school, don’t work hard and don’t do well. In a 2008 survey of public high school teachers, 21 percent judged student absenteeism a serious problem; 29 percent cited ‘student apathy.’ ”

There is a lot to Samuelson’s point — and it is a microcosm of a larger problem we have not faced honestly as we have dug out of this recession: We had a values breakdown — a national epidemic of get-rich-quickism and something-for-nothingism. Wall Street may have been dealing the dope, but our lawmakers encouraged it. And far too many of us were happy to buy the dot-com and subprime crack for quick prosperity highs.

Ask yourself: What made our Greatest Generation great? First, the problems they faced were huge, merciless and inescapable: the Depression, Nazism and Soviet Communism. Second, the Greatest Generation’s leaders were never afraid to ask Americans to sacrifice. Third, that generation was ready to sacrifice, and pull together, for the good of the country. And fourth, because they were ready to do hard things, they earned global leadership the only way you can, by saying: “Follow me.”

Contrast that with the Baby Boomer Generation. Our big problems are unfolding incrementally — the decline in U.S. education, competitiveness and infrastructure, as well as oil addiction and climate change. Our generation’s leaders never dare utter the word “sacrifice.” All solutions must be painless. Which drug would you like? A stimulus from Democrats or a tax cut from Republicans? A national energy policy? Too hard. For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”

So much of today’s debate between the two parties, notes David Rothkopf, a Carnegie Endowment visiting scholar, “is about assigning blame rather than assuming responsibility. It’s a contest to see who can give away more at precisely the time they should be asking more of the American people.”

Rothkopf and I agreed that we would get excited about U.S. politics when our national debate is between Democrats and Republicans who start by acknowledging that we can’t cut deficits without both tax increases and spending cuts — and then debate which ones and when — who acknowledge that we can’t compete unless we demand more of our students — and then debate longer school days versus school years — who acknowledge that bad parents who don’t read to their kids and do indulge them with video games are as responsible for poor test scores as bad teachers — and debate what to do about that.

Who will tell the people? China and India have been catching up to America not only via cheap labor and currencies. They are catching us because they now have free markets like we do, education like we do, access to capital and technology like we do, but, most importantly, values like our Greatest Generation had. That is, a willingness to postpone gratification, invest for the future, work harder than the next guy and hold their kids to the highest expectations.

In a flat world where everyone has access to everything, values matter more than ever. Right now the Hindus and Confucians have more Protestant ethics than we do, and as long as that is the case we’ll be No. 11!