U.S., China Agree to Investment Treaty Talks, Clash on Currency

By John Brinsley and Li Yanping

June 19 (Bloomberg) -- China and the U.S. agreed to negotiate an investment treaty and urged each other to strengthen their exchange rates in the fourth round of semiannual economic talks.

Treasury Secretary Henry Paulson said he was content to have ``frank'' exchanges on currency issues and hailed the Strategic Economic Dialogue for deepening the two nations' engagement. The countries also signed a 10-year deal aimed at ensuring the world's two biggest oil-consuming nations have enough energy to power their economies.

The Treasury chief, who started the SED in 2006, steered the forum toward energy security, environmental protection and financial-market access that can be taken up by the next U.S. administration after January.

``Paulson will be making the case that there's been enough progress in opening China's markets to continue this dialogue in some form in the next administration,'' said Charles Freeman, a fellow at the Center for Strategic and International Studies and a former top U.S. trade official on China.

Paulson and China's Vice Premier Wang Qishan led two days of talks in Annapolis, Maryland that spanned trade and investment issues to food safety, intellectual property rights and protecting the environment.

Heading into the meetings, Paulson called on China to end price controls on domestic fuels, a request that went unheeded during the SED. As at past gatherings, he urged China to let markets play a bigger role in setting the yuan's value, and on that issue China also gave no new ground.

Pressing on Yuan

``I welcome the recent increased pace of appreciation of the renminbi,'' Paulson said in a press conference in Washington yesterday, using another term for the yuan. Greater ``flexibility'' in the yuan is ``a crucial tool in controlling inflation'' for China, he said.

China's officials responded by flagging concerns about the dollar's decline, which People's Bank of China Governor Zhou Xiaochuan said had pushed up commodity prices around the world.

``Emerging economies are feeling the pinch,'' Zhou said on June 17. ``A weakening dollar may push up prices of commodities such as crude oil.''

Chinese Assistant Finance Minister Zhu Guangyao said yesterday that ``excessive depreciation is not to the interest of all countries including the U.S.'' Zhu urged the U.S. to ``plan a responsible role in terms of the dollar issue.''

Paulson said he didn't have an issue with the comments, reiterating his confidence that U.S. competitiveness is ``going to be reflected in our currency value.''

`On the Offensive'

China ``has also gone on the offensive'' on exchange-rate discussions, Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a note to clients.

Paulson and Wang signed an accord between the world's two biggest greenhouse-gas emitters to cooperate on energy and the environment, focusing on air, water, clean sources of power, transportation, and conservation of forests and wetlands.

U.S. officials have urged China to drop tariffs on environmental equipment, saying such barriers hinder efforts to clean up a country that the World Bank says has 16 of the world's 20 most-polluted cities.

The two sides also agreed to start negotiations on an investment treaty that would grant easier access for companies to buy assets in the other country.

The talks may take at least a year to complete, one U.S. official said on condition of anonymity yesterday. That puts them beyond President George W. Bush's administration, which ends Jan. 20.

Timing Issue

``We are concerned about the timing,'' House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, wrote in a letter to Paulson. The administration ``should make clear to China that all major decisions in the negotiations will necessarily be left to the next president,'' he wrote.

China would be the largest country with which the U.S. signed an investment treaty, and the talks come as American firms seek greater access to the world's fastest-growing major economy. U.S. business groups representing companies such as Citigroup Inc. have pushed China to allow a greater role for overseas enterprises.

An investment pact may also benefit China as it pushes state-owned companies including oil explorer Cnooc Ltd. and smelter Aluminum Corp. of China Ltd. to buy oilfields and mines abroad to feed its expanding economy. Cnooc in 2005 failed in a bid to buy El Segundo, California-based Unocal Corp. because of U.S. lawmaker opposition.

Financial Deals

The Treasury said China agreed to allow non-deposit-taking foreign companies provide consumer finance ``on a pilot-project basis'' and to let foreign firms list on its stock exchanges through issuing shares or depository receipts.

China will also ease requirements for foreign banks to issue subordinated, yuan-denominated bonds. Authorities will conduct a review by year-end of foreign participation in Chinese securities, futures and fund management firms and make policy recommendations, according to a joint statement released by the two sides.

China pledged to consider participating with other countries to ease oil-market disruptions, through an International Energy Agency initiative.

John Engler, president of the U.S.'s National Association of Manufacturers, said the SED, ``while not achieving everything we had hoped, has had a positive effect.''

Washington-based Engage China, a coalition of 10 financial- services trade groups, called the results ``modest.''

The next SED meeting is scheduled for December in Beijing.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.netRob Delaney in Washington at robdelaney@bloomberg.net

Last Updated: June 18, 2008 20:55 EDT

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