China says yuan reform in focus for talks with US

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China staked out areas of contention with the United States on Friday ahead of strategic talks in Washington next week, including the pace of yuan reform and concerns about US debt levels, but Beijing also stressed the two sides' co-dependency.

China agrees with the United States on the direction of yuan reform, but the two countries differ on the pace of appreciation, Chinese Vice Finance Minister Zhu Guangyao said at a briefing, setting the stage for a clash at next week's annual Strategic and Economic Dialogue with the United States.

China's currency policies have been a major irritant in ties for several years and a focus of US congressional anger at China since at least 2005. Contention over the yuan exchange rate has cooled a bit this year, but this remains a major irritant in relations.

Zhu said China and the United States have different views on yuan exchange rate reform, with the United States stressing appreciation of the currency.

"On these specific issues, I frankly acknowledge that China and the United States have different views. Therefore, we need to have discussion," he said.

In comments that broke little new ground and signaled that Beijing would not be goaded into swift action, Zhu reiterated Beijing's position that China's exchange rate policy is a matter of sovereignty.

Zhu said that Vice-Premier Wang Qishan told Treasury Secretary Timothy Geithner that the yuan exchange rate reform was in China's interest and that China wants deeper discussion on fiscal policies.

Zhu made clear China had concerns of its own that would likely be aired in the discussions.

"We hope that the United States will provide a healthy legal and institutional setting for investment. In particular, we hope that the United States will not discriminate against Chinese state-owned companies." Zhu said, while providing assurances Beijing would give foreign companies access to China's markets.

Turning the focus toward challenges faced by the United States, Zhu said China is paying high attention to the US debt and fiscal deficit.

"We are paying a lot of attention to this, and Treasury Secretary Geithner has swiftly informed Vice Premier Wang Qishan about the situation," he said. "We hope that the United States in its fiscal clean-up will be able to adopt effective measures based on President Obama's proposal."

He reiterated that Beijing is not deliberately seeking a trade surplus with the United States.

"China's position is clear -- that we are not deliberately pursuing a large trade surplus," Zhu said. "This is a mutually beneficial, win-win economic relationship."

A key cause of friction between Beijing and Washington is the US trade deficit with China. Despite a pledge by both countries to work together on overcoming global imbalances, the US trade deficit with China in 2010 rose to $273.1 billion, a 20.4 percent increase in the shortfall in 2009.

But many US lawmakers believe that an undervalued yuan is a root cause of the trade imbalance, with some saying the currency is undervalued by 15 percent to 40 percent, giving Chinese companies an unfair price advantage in international trade.

The Obama administration continues to say that Beijing must move faster to let the yuan rise.

China loosened its currency from a nearly two-year peg to the dollar in June, and this year the People's Bank of China has guided the yuan to record highs. It has now appreciated about 5 percent since June, and 1.5 percent since the start of this year.

Policymakers in Beijing have also made it clear they will deploy the currency as a weapon to fight inflation, which hit a 32-month high of 5.4 percent in March. That inflation means China's real exchange rate has increased more than the nominal rate.

Zhu added that managing China's growing foreign exchange holdings was "challenging."

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