U.S. sees China pushed to let market forces work

WASHINGTON (Reuters) - As China confronts the prospect of an aging population that will drive up wages, Beijing will be compelled to let market forces play a larger role in managing the economy, a senior U.S. Treasury Department official said on Tuesday.

China faces “an extraordinarily steep demographic cliff” that will reduce the advantage of a young labor force willing to work cheaply,” Lael Brainard, the Treasury’s undersecretary for international affairs, told a group of business people, diplomats and academics

“Wages and costs are rising rapidly. There is a self-reinforcing momentum to have market forces determine how capital is allocated, how exchange rates adjust,” Brainard said during a discussion on last week’s Strategic and Economic Dialogue talks in Beijing.

Washington has pushed Beijing to allow the yuan currency to trade more freely and to honor foreign technology patents.

The exchange rate is a sore point for the U.S. business community, which sees it as deliberately undervalued by Chinese authorities to seek an unfair trade advantage.

Brainard said changes in the global economy will force China to take a more market-oriented approach that will promote the level of innovation needed to address the changes.

“The model of undercutting in export markets on the basis of price is no longer going to serve China,” Brainard said, noting the country has big over-investments in some resource industries and faces lower-cost competition from other Asian countries.

“China’s leaders and people recognize that they have an environment that is quite deficient when it comes to protecting innovation or encouraging innovation... and (know) that they’re going to need to move in the direction of higher value, more domestic consumption, less reliance on a tapped-out European consumer,” Brainard added.

She said the Obama administration has made progress in raising U.S. exports to China and noted that the exchange rate for the yuan has appreciated by 13 percent in real terms over the past two years.

But Brainard said “the process of adjustment is incomplete” and the yuan needs to appreciate more “in order to correct the full amount of the misalignment,” though she sidestepped questions about how much more it needs to rise.

“That process, we hope, will be taken increasingly in response to market forces,” she said. “That’s why recent moves to alter the nature of the exchange rate regime, to widen the bands, to diminish the amount of intervention, are welcome.”

The talks in Beijing last Thursday and Friday were largely overshadowed by the drama surrounding negotiations over the fate of blind rights activist Chen Guangcheng, who plans to study in the United States under a deal between U.S. and Chinese authorities.

Brainard, however, pointed to advances made at the talks, including China’s agreement to raise the ownership cap to 49 percent from 33 percent for foreigners establishing joint venture brokerages there to trade commodity and financial futures.

A top official with the U.S.-China Business Council, which represents about 250 U.S. companies doing business with China, agreed the annual talks contained some real benefits for American businesses.

“We had been hearing prior to the meetings from U.S. government officials that they thought they actually were finally seeing some traction on financial services reform issues,” said Erin Ennis, vice president of the council.

“To see the outcomes on both increasing the ownership cap for securities joint ventures and a reducing the waiting period for those firms to be able to expand their licenses...the U.S. got what it was expecting to get out of the meetings, and in our view it was a pretty good set of deals,” Ennis said.

China agreed that joint-venture securities firms seeking to expand into other lines like brokerages, fund management and trading activities in the future will only face a two-year waiting period instead of five years.

Brainard said prospects were good for prying Chinese markets open more fully and she suggested China needs to become more of a services-oriented economy rather than a manufacturing center for the rest of the world.

She noted that Chinese firms want to make more direct investments outside their home market, including in the United States, which she said creates leverage for further opening China’s markets to U.S. firms.

“Our business community has a lot of concerns about the impediments in China’s market, and as Chinese firms are looking to the U.S. market we have more traction to get progress on two-way investment,” Brainard said.

Editing by Leslie Adler