Interview with AmCham's Charles Martin

The revaluation of the Chinese renminbi currency has had a modest effect only on US business interests in Beijing and China, according to American Chamber of Commerce (AmCham) President Charles M. Martin in Beijing.

"Some people have marginally benefited from the revaluation, and others have been marginally disadvantaged, but the overall effect has been minimal because the revaluation was so modest," he said. "I think it let some of the air out of the balloon, but I think there is an expectation of more."

"It was a good first step, but China must have the time it needs to evaluate the effect of what it has done. In this case, prudence is a wise policy."

Martin, who holds a doctorate in Chinese studies from Harvard University and who has extensive business and diplomatic experience in China and Asia, said he believes it would be wise to consider the currency issue within a broader context, such as in the "strategic dialogue" suggested by Chinese President Hu Jintao and US President George W. Bush at the Asia-Pacific Economic Cooperation (APEC) Summit in Chile in 2004.

On July 21, the People’s Bank of China, with the authorization of China’s State Council, said the renminbi would no longer be "pegged" to the US dollar and would, instead, "reference a basket of currencies." It also said the renminbi would be allowed to "float" or fluctuate by as much as 0.3 percent from a rate announced by the Chinese central bank each day “based on market supply and demand” under the control of a "managed floating exchange-rate regime."

The 2.1 percent rise in the value of the renminbi per US dollar was widely hailed and welcomed in the United States as a first step in China’s overhaul of its currency regime, but others, including US Senators Charles E. Schumer, a New York Democrat, and Lindsey O. Graham, a South Carolina Republican, called for a sharper and more clearly defined revaluation.

In a Washington Post article Schumer was quoted saying, "We can tell you that we are not satisfied with simply a 2 percent revaluation."

Others criticized the ambiguities surrounding the "basket of currencies" and how this mechanism would work.

Schumer’s statement reportedly was a response to Chinese media reports, and a statement from China’s central bank Governor Zhou Xiaochuan, that more action on the renminbi’s valuation could not be expected any time soon. He and Graham suggested they may request a vote, as soon as in October, to impose tariffs of up to 27 percent on imports from China to the United States, unless China does more.

Zhou said other actions must be taken first in China, before further revaluations could be considered.

In an article published on People's Daily Online (http://english.people.com.cn), Zhou explained China’s situation.

He said the renminbi’s reform is a sensitive thing that requires domestic stability and sound financial institutions and markets. A starting place for China, according to Zhou, is with the reform of China’s large, State-owned commercial banks.

"The goal of our reform, Zhou pointed out, is to put in place a managed floating-exchange rate regime based on market supply and demand, that is, to give market a bigger role. To that end, China has gradually lifted restrictions on foreign exchange using, supplying, converting and carrying, so as to make the market reflect demand-supply relations more effectively.

"Another condition is that the foreign exchange market must have risk management instruments available to enterprises and financial institutions, such as the Foreign Exchange Forward Contract (DF), so that enterprises would be able to protect their interests by using various instruments on the financial market when the exchange rate floats.

"When these get done with, financial conditions would be mature, Zhou said. When our central leadership sees all necessary conditions are finally here, then it is time to take the action."

Martin said US companies in China whose earnings are in renminbi (from operations within the China market) benefited from the revaluation.

"About 70 percent of US companies are producing for the Chinese market. Some of their components are imported, some are bought locally, but they are benefiting. The products of companies that export from the United States to China—the people the US Congress is worried about—are cheaper now in China."

Martin asserted that hardly anyone could predict what the full effect of alterations of the Chinese currency regime might be, another reason for giving the Chinese Government a benefit of a doubt as it copes with change and the effects the revaluations—present or future—might have on the Chinese economy.

"A 27 percent to 30 percent change (revaluation) is not going to happen in any sense…not anytime soon. It could be a source of instability, and that would not be good for China, Asia or the United States, but I think both sides understand there’s a lot of politics in this."

Martin said he thinks it is much more important for the United States and China to focus on their strategic interests. He said he hoped that US Deputy Secretary of State Robert Zoellick’s talks with Chinese officials in early August concerning a "strategic dialogue," suggested by Presidents Hu and Bush, would prove fruitful in this regard.

Martin said he continues to believe that there are many more commonalities than differences between the United States and China in particular, especially in the business sense, but it’s the differences that are generating heat, especially in the US Congress.

"The main problem that we have got to address is the widespread view in Congress that there is a fundamentally unfair trading relationship between China and the United States.  "There’s no one simple thing we can do to solve the trade imbalance. But, there are some places where we can start, such as improved IPR enforcement, for instance.”"

Martin said he believes it’s in China’s, and especially Beijing’s, interest to crack down harder on violations of intellectual property rights.

"Yes, some of the businesses now dealing in pirated videos, accessories and clothing are going to get hurt, but these people are also costing Beijing a lot. I believe that if companies saw a real effort on IPR, they would be more willing to do more research and development in China, and not just the research and development related to product adaption, but real research and development on new products and technologies.

"If you look at it in just this one way, you can see that IPR violations are costing China a lot. I see this as a way that Beijing in particular could jump to the front and get a competitive advantage."

Martin, who has led AmCham since November 2003, said AmCham is increasingly satisfied with actions and statements made concerning IPR at the national level, but added, "We are turning our attention more and more to the local level, where enforcement takes place and is needed."

On the other hand, Martin lauded Time Warner Incorporated’s new pricing of its videos, at about 30 percent above the “street” rate for poor-quality pirated DVDs in the Beijing market, which makes their higher-quality products more accessible in a legal way to the Chinese people.

"If the Beijing Municipal Government improved its enforcement of its IPR regulations, it would really shock people into new ways of thinking about the city. More R&D activity and more investment in general would come to Beijing. "  He added that US companies doing business across China are increasingly turning to local officials for assistance and assurance about the protection of their intellectual property rights. “They’re building these things into their local agreements."

In general, Martin said AmCham members are fairly satisfied with the business environment created by Beijing’s city officials.

In other trade issues: Martin said he believes that communications and information exchanges between China’s Ministry of Commerce and the US Commerce Department are good, but he said he thinks the Chinese Government and Chinese businesses need to do more to help people in the United States better understand China.

"People in the United States need to understand that China needs energy if it is to continue with the transformation that is taking place in this country. In this regard, the CNOOC deal (CNOOC’s bid for US-based Unocal) wasn’t prepared very well. Then again, the Chinese company saw an opportunity and had to move on it."

Martin said he expects to see an agreement resolving textile issues between the United States and China within "a month or two." He said the agreement will probably be similar to a recent textile agreement reached between China and the European Union.