April 12, 2010, 6:39 p.m. EDT

Obama, Hu discuss yuan on sidelines of nuclear summit

By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) -- President Barack Obama and Chinese President Hu Jintao discussed China's de-facto currency peg to the dollar on the sidelines of the nuclear-safety summit, a White House aide said Monday.

Obama met with Hu for an hour and a half. Treasury Secretary Timothy Geithner and other top U.S. and Chinese officials attended the bilateral meeting.

WSJ's Jerry Seib previews his latest column, in which he discusses the importance of the nuclear summit taking place in Washington.

Obama repeated the U.S. position that it was important for China to move toward a more market-oriented exchange rate, the official said.

The White House official added that the talks were positive and constructive.

In a separate briefing, Chinese officials stressed the importance of "stable" bilateral trade relations.

Following the meeting, China's state-run Xinhua news agency quoted Hu as saying that any reform to his nation's currency exchange rate will be based on China's own economic interests.

A separate Xinhua report said Obama had told Hu that the U.S. respects China's sovereignty in determining its currency policy and hoped a solution could be found through dialogue.

The talks did not focus exclusively on currency. The United States also wants China's help on dealing with nuclear threats from Iran and North Korea. The U.S. official said China was prepared to work with the United States on Iran.

Analysts do not expect any announcement of a shift in China's currency policy immediately after the meeting. Although analysts are convinced that China will allow the yuan to strengthen gradually, many don't see an announcement until next month at the earliest.

Xiabo Hu, a professor of political science at Clemson University, said the visit of China's president to Washington is a sign of a significant thaw in relations between the two countries.

The Obama White House and Chinese officials got off to a better start in their relations than historically had been the case, Hu commented. But the bilateral relationship hit a rough patch in recent months over a new global climate-change treaty, U.S. arms sales to Taiwan and a White House meeting between Obama and the Dalai Lama, he said.

Hu from Clemson said he expected China to move to adjust the yuan "sooner rather than later."

Signals from Beijing suggest that China will widen the yuan-trading band, which would lead to incremental changes, according to analysts.

Token gesture, or meaningful move?

Carl Weinberg, economist at High Frequency Economics, believes that China would only tolerate a 3% yuan appreciation per year. "We believe that if China agrees to a yuan revaluation it will only be a small one," he wrote to clients.

This may not be enough to assuage Chinese critics in the U.S. Congress, who argue that the currency is anywhere from 25% to 40% undervalued. Indeed, some groups have issued pre-emptive statements arguing that a 3% annual appreciation would be a fig leaf.

"Settling for token China currency moves would betray American producers and their employees and delay U.S. recovery," said the U.S. Business and Industry Council, a trade group of small manufacturers.

China's move could be smart politics. Once before, in 2005, China announced it would allow its currency to slowly strengthen and this took the steam out of calls for Congress to impose tariffs on Chinese imports.

Over the weekend, China reported a $7.24 billion trade deficit in March, significantly wider than expected and the first monthly trade gap since 2004. See full story.

Many analysts see the deficit as temporary and anticipate China will swing back to a trade surplus in the coming months.

However, Weinberg said he detected a steady decay in China's trade surpluses since the global financial crisis began.