Sino-U.S. Relationship Back on Track

Recently, the long running RMB exchange rate issue that troubled the Sino-U.S. relationship has again become the focal point of dispute between the two powerful nations.

On March 14th, 130 U.S. congressmen and senators sent a letter to Treasury Secretary Timothy Geithner and Secretary of Commerce Gary Locke urging Washington to take immediate action against China as a “currency manipulator.” The next day, Sen. Charles Schumer (D – N.Y.), and Sen. Lindsey Graham (R-S.C.), along with more than 10 other senators, put in place a motion on the RMB exchange rate issue. The motion was to start the legislative process to pressure China into currency appreciation.

Capitol Hill’s big move quickly stirred a strong reaction across the ocean at Zhongnanhai. After Chinese Premier Wen Jiabao made his statement, China’s various government departments — such as the Ministry of Commerce, Ministry of Foreign Affairs and the People’s Bank of China — also issued a statement to say why there should not be a sharp yuan appreciation.

Public opinion unanimously condemned the United States. The Chinese exchange rate issue was raised a month before Chinese President Hu Jintao’s planned visit to the United States for the International Nuclear Safety Summit. Due to Obama’s previous involvement in arms sales to Taiwan and meeting with the Dalai Lama, the Chinese public was so highly discontented with the United States that it threatened Hu’s trip.

This climate was obviously not conducive to good Sino-U.S. relations. Therefore, there were pessimists and international media that thought the confrontation could escalate to an all-out trade war. However, recent developments have suggested otherwise. The dramatic turn of events surprised many current affair observers. The Wall Street Journal indicated that the turn of events is as surreal as the fairy tale Alice in Wonderland.

The Chinese Foreign Ministry announced on April 1st that Hu Jintao would attend the Nuclear Safety Summit in the U.S. as planned. The next day, President Hu Jintao and Obama talked over the phone for more than an hour. After the conversation, the White House reciprocated with Geithner, announcing that they had postponed the scheduled April 15th meeting to decide whether China was a “currency manipulator.” The delay would provide a good atmosphere for Hu Jintao’s visit. The two countries also announced that Hu Jintao would have a private summit with President Obama during the original scheduled summit.

In the midst of Sino-U.S. diplomatic drama, another drama unfolded as Geithner visited Hong Kong and China. He first met with Hong Kong Financial Secretary John Tsang, Chief Executive Donald Tsang, former Chief Executive Tung Chee-hwa, the former chief executive of the HKMA, Hong Kong and other dignitaries, then again in Beijing for economic affairs, meeting with Chinese Vice Premier Wang Qishan.

Although both sides have not disclosed the specific details of their meetings, it was reported that “they exchanged views on bilateral relations and [the] global economic situation.” Many believed the meetings were related to the RMB exchange rate. Sources pointed out that in a few days China will announce the exchange rate policy, allowing the yuan to appreciate faster, but in small steps. In fact, the central parity against the dollar yesterday stood at 6.8259. The exchange rate hit a new high for two consecutive days in 10 months.

The RMB exchange rate is not the only problem between the two countries. The United States has repeatedly asked the Chinese to get involved with Iran, North Korea and other countries’ nuclear proliferation issues. By the time Hu Jintao announced the decision to attend the summit in the United States, the U.S. ambassador to the UN, Susan Rice, confirmed China had agreed to begin discussions on sanctions against Iran under the framework of the UN Security Council.

From the above developments, it seems that both sides intend to discuss the issues of the Chinese-U.S. exchange rate, sanctions against Iran and even North Korea to aid the best interests of both parties. Although the Chinese Foreign Ministry has repeatedly stressed that the RMB exchange rate and international nuclear hotspot issues were not the main reasons for Hu Jintao’s participation in the nuclear summit, it did later indicate that “Hu and Obama’s summit” will definitely have in-depth discussions on a wide range of issues. Therefore, there is a high possibility that the private summit would discuss the exchange rate, the Iranian nuclear problem and other issues involving bilateral and even global interests. Both sides will use this crisis as an opportunity to foster a stronger relationship.

Sino-U.S. relations have been able to improve quickly thanks to the diplomatic guiding ideology of both countries. For China, confronting the U.S. on the yuan exchange rate conflicts with Hu Jintao’s philosophy of harmony diplomacy, and the U.S. has recognized that it has a stake in China’s prosperity. If China were to suffer, the U.S. would not escape unscathed. Therefore, the U.S. will not risk long-term interests to gain an upper hand in the exchange rate issue.

The two world powers are well aware that Sino-U.S. relations now are different from the U.S.-Soviet relations of older times. The two sides are not in a hostile relationship, but rather in delicate competition and a cooperative relationship. The RMB exchange rate crisis precisely illustrates that both sides recognize the delicate balance and will try to avoid trade war and all-out confrontation at all costs. The all-out confrontation could be costly and affect both countries in the long run.