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Inflation Won’t Drive Yuan Appreciation, China’s Hu Tells Papers

January 16, 2011, 2:15 PM EST

Jan. 16 (Bloomberg) — Chinese President Hu Jintao rejected U.S. arguments that allowing the yuan to appreciate against the dollar would help the government in Beijing tame inflation.

Hu, who will meet President Barack Obama in Washington this week, made the comments in responses to written questions from the Wall Street Journal and the Washington Post, the newspapers reported on their websites.

The Chinese president said his government is fighting inflation with a package of policies, including interest rate increases, and that rising prices can “hardly be the main factor in determining the exchange rate policy,” according to a transcript of the answers. He said the increase in the cost of living is “on the whole moderate and controllable,” according to the transcript.

Prices are climbing faster in China than in the U.S., making Chinese goods less competitive, Treasury Secretary Timothy F. Geithner said last week. Speaking in Washington on Jan. 12, he said that, while the yuan was still “substantially undervalued,” the “fundamental forces that are pushing Chinese productivity growth and are pushing inflation higher will bring about the necessary adjustment in exchange rates.”

U.S. lawmakers argue that an undervalued yuan hurts U.S. manufacturers and widens the U.S. trade deficit by artificially holding down the price of exported Chinese goods.

While “there are some differences and sensitive issues” between the two countries, Hu said, “we both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

‘Product of the Past’

The current international currency system, with the dollar’s primacy in as a reserve currency and in trade is “the product of the past,” Hu also told the newspapers.

He pointed to China’s effort to expand the role of the yuan in cross-border trading and investment, while acknowledging it “will be a fairly long process” to make it a fully fledged international currency.

In an allusion to the Federal Reserve’s policy of buying $600 billion of Treasuries to stimulate the economy, Hu told the newspapers that U.S. monetary policy has a “major” impact on global liquidity and on capital flows.

Hu pledged to “continue to improve laws and regulations concerning foreign investment,” and offer “a stable and transparent legal and policy environment.” He said U.S. companies have a level playing field in his country and their “innovation, production and business operations in China enjoy the same treatment as Chinese enterprises.”

Socialist Democracy

Hu said China will continue to develop a “socialist democracy. He called for an “increased dialogue and contact” with the U.S. and said the countries should “abandon the zero- sum Cold War mentality” and “respect each other’s choice of development path.”

Hu answered only some of the questions submitted by the newspapers, not addressing one about Nobel Peace Prize winner Liu Xiaobo and another on China’s growing naval power, among others, according to the Journal.

Hu said that China, which “made relentless efforts to help ease the tension” between South Korea and North Korea, “pays a great deal of attention to the Korean nuclear issue” and stands “for achieving denuclearization of the peninsula in a peaceful way through dialogue and consultation to maintain peace and stability of the peninsula and Northeast Asia.”

–Editors: Ann Hughey, Mark Rohner.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net