Will Greece & Co. Poison US-China Trade?

Derek Scissors / May 07, 2010

Uh oh. Just when it seemed Sino-American shouting over the undervalued yuan was quieting down, surprise guests are threatening to incite a riot. The problems in Greece, Portugal, and perhaps elsewhere in southern Europe are a threat to the euro. A damaged euro may mean the widely-anticipated change in Chinese currency policy is delayed, which might be the last straw for the U.S. Congress.

In March and April, it seemed Congress was serious about applying trade sanctions to China in retaliation for what was perceived as harmful currency policy. There was diplomatic activity by the Department of the Treasury prior to issuing its report on currency manipulation, the report was delayed, and Congress calmed. It was presumed by most observers the PRC had given sufficient assurance to the Obama Administration that some currency change was coming, and Congress was willing to wait.

Enter the wounded euro. There are economic opportunities in a weak euro with regard to making the yuan more flexible, which is a far superior solution to revaluation. Unfortunately, Beijing loves stability above all and the currency environment is unstable. This line is now being strongly pushed by senior Chinese officials. Moreover, the conventional wisdom is that Beijing prefers to delink from the U.S. dollar in favor of a basket of currencies. That desire is overblown but it is nonetheless true that repegging the yuan to a basket of currencies looks less appealing than two months ago. (more…)