Paulson May Find China Snubs Call for Yuan Gains: Chart of Day

By Lee J. Miller and Kim Kyoungwha

Dec. 2 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson may clash with Chinese officials this week when he seeks a stronger yuan at meetings in Beijing, according to TD Securities Ltd. and CFC Seymour Ltd.

Paulson plans to reiterate the case for a stronger yuan to aid U.S. companies by making it more affordable for China to buy foreign goods. The government of the world’s most-populous nation may favor a weaker currency to support sales abroad.

“There is now tentative evidence that the authorities are using the exchange rate to help stimulate the faltering Chinese economy,” Stephen Koukoulas, the London-based head of global foreign exchange and fixed-income strategy at TD Securities, wrote in a report late yesterday. “The slippage of the yuan could well be designed to shore up the export sector.”

The CHART OF THE DAY shows the yuan-dollar rate and China’s trade surplus since July 2005, when the central bank ended a fixed exchange rate. The surplus widened this year even as the yuan strengthened 6.1 percent. Yesterday, though, the Chinese currency fell 0.67 percent, the most since the peg was removed. It traded at 6.8851 today, near a five-month low.

Currency reform “is as important now as it ever has been,” David McCormick, the Treasury’s undersecretary for international affairs, said yesterday in Washington ahead of a two-day meeting starting Dec. 4 under the U.S. and China’s Strategic Economic Dialogue. A People’s Bank of China spokesman, who declined to be named, said in a phone interview that he hadn’t heard of any change in foreign-exchange policy principles.

China has the upper hand, said Dariusz Kowalczyk, a Hong Kong-based currency analyst with CFC Seymour Ltd.

“If you want to deliver bad news to the U.S., do it now, when their authority has been weakened by the financial crisis and Paulson’s credibility has been hurt as well,” Kowalczyk said yesterday.

To contact the reporters on this story: Lee J. Miller in Bangkok at lmiller@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.