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UPDATE 3-China hits back at U.S. in currency row

Published 01/24/2009, 06:07 AM

(Adds analyst comment in paragraph 5)

By Chris Buckley

BEIJING, Jan 24 (Reuters) - China's central bank on Saturday said U.S. accusations that it was manipulating the yuan currency were misleading, a day after Beijing cautioned incoming Secretary of State Hillary Clinton to handle their ties with care.

The remarks from Su Ning, a vice governor of the People's Bank of China, were the bank's first public reaction to comments from U.S. Treasury Secretary-designate Timothy Geithner, who said this week that Beijing was manipulating its currency exchange policies to gain an unfair trade advantage.

"These comments are not only out of keeping with the facts, even more so they are misleading in analysing the causes of the financial crisis," Su said of Geithner's comments to the Senate Finance Committee, according to the official Xinhua news agency.

The exchange marks a testy start to ties between Beijing and the Obama administration, which may tarnish vows of cooperation in combating the global economic slowdown and security threats.

"China wants a good start with Obama, but trade conflicts are the one issue most likely to hurt this," said Shi Yinhong, an expert on ties between the two nations at Renmin University in Beijing. "Now our diplomacy is conditioned by the financial crisis."

China worries that its already slowing exports will be even harder hit by U.S. policies to narrow their trade imbalance.

Many U.S. lawmakers believe the yuan is much undervalued, giving Chinese exporters a big advantage that they blame for U.S. job losses and the U.S. trade deficit, which hit a record $256.3 billion in 2007.

Su did not directly accuse Geithner of trade protectionism. But the Chinese official's warning was clear enough.

"We believe that faced with the financial crisis there should be a spirit of self-criticism," Su said while visiting a business newspaper's office in Beijing, according to Xinhua.

"The international community is currently working together in actively responding to the financial crisis, and it must avoid exploiting different excuses for renewing or encouraging trade protectionism, because these are of no help in withstanding the financial crisis."

Su's swipe came after China's Foreign Minister urged Clinton to be careful with sensitive issues that could strain ties, calling the relationship between their two nations one of the world's most important.

Foreign Minister Yang Jiechi made the remarks to Clinton, settling into her new job as Washington's top diplomat, in a telephone call on Friday, the Chinese Foreign Ministry website (www.fmprc.gov.cn) reported on Saturday.

"The China-U.S. relationship is one of the world's most important bilateral relations," Yang told Clinton, according to the report.

Each side should "respect and show consideration for the other's core interests and appropriately handle differences and sensitive issues", he said.

The report did not specify those issues, but Beijing considers Taiwan its most sensitive topic in dealings with Washington.

Beijing says self-ruled Taiwan must accept eventual reunification with the mainland and objects to Washington's military aid to and political support for the island. China has also been angered by U.S. pressure over human rights and Tibet.

Yang, a former ambassador to Washington, said the two powers should "handle bilateral relations by adhering to a strategic high-point and a long-term perspective".

TRADE DISPUTES

But trade and the yuan are already emerging as a points of tension.

Under former President George W. Bush, the Treasury Department urged Beijing to move to a market-determined exchange rate and saw some progress since July 2005.

Yet it refused to formally call China a currency manipulator, which under U.S. law would require the Treasury Department to begin "expedited" negotiations with Beijing to reduce China's trade surplus and eliminate any "unfair" currency advantage.

The China Daily, an English-language paper that often reflects official policy, said Geithner's position was "a clear move away from the stance of the Bush administration".

The dollar has weakened by about 16 percent against the yuan since China revalued it in mid-2005, according to Reuters data. But many U.S. industry groups want much more drastic action.

The yuan closed lower against the dollar on Friday and traded mostly below the Chinese central bank's mid-point, with speculation that Geithner's comments could spark a brief period of modest yuan depreciation. (Editing by Jerry Norton and Alex Richardson)

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