The U.S. trade deficit widened to near a two-year high in June, as imports from its largest trading partners ballooned.

The shortfall in international trade of goods and services surged 19% to $49.90 billion, the Commerce Department said Wednesday.

The deficit is much larger than the Commerce Department had calculated in its initial second-quarter growth estimate, and the figures are likely to weigh in a downward revision of U.S. gross domestic product growth during the period.

Economists surveyed by Dow Jones Newswires had expected the deficit to expand to $42.7 billion in June. The deficit in May was revised down to $41.98 billion from an initial estimate of $42.27 billion.

The U.S. trade gap with China expanded to $26.15 billion in June, the widest level since October 2008 and a 17% gain on the previous month’s bilateral deficit of $22.28 billion. Imports expanded $3.83 billion, while exports slowed by $38 million. Earlier this week, China’s trade surplus ballooned far above market expectations, hitting $28.7 billion as exports grew faster than imports.

The figures are likely to continue to give ammunition to federal lawmakers pressuring the Obama administration to take China to task on its currency policy. Although China earlier this year announced a move to a more flexible exchange rate, lawmakers say the yuan is still artificially low, undermining U.S. competitiveness. Legislators are threatening to pass retaliatory laws that would penalize imports from countries that are deemed to be manipulating their currency.

In trade with other large partners, the U.S. registered an expanding deficit with Mexico at $6.21 billion while the deficit with the European Union ballooned by 26% to $7.76 billion. The deficit with Japan surged 45% to $5.25 billion while with Canada, it grew to $2.58 billion, up $320 million from the previous month.

Trade had been one of the pillars of support to the economy during the recent recession but has weighed on recovery growth.

The real, or inflation-adjusted deficit, which economists use to measure the impact of trade on GDP, climbed to $54.14 billion in June from $45.99 billion the month before, Commerce said.

“This is spectacularly terrible,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics. He expected the inflated deficit to shave up to half a percentage point off growth.

Joshua Shapiro, chief U.S. economist for MFR, said that the trade data, combined with the expected revisions to inventories and nonresidential construction, could push estimates of second-quarter real GDP growth down to 1%, compared with initial estimates of 2.4%.

U.S. exports contracted 1.3% to $150.45 billion, from $152.44 billion in May. Imports increased at a faster rate, expanding 3.1% to $200.35 billion from $194.42 billion.

Imports of consumer-goods imports increased 7.8%, driven by pharmaceuticals and household goods, auto imports were up 6.6% and capital goods rose 1.2%.

The U.S. bill for crude oil imports in June rose to $22.60 billion from $21.54 billion the month before, as volumes surged nearly 32 million barrels to 311.93 million barrels. The average price for oil fell nearly 6%, or $4.49 a barrel, to $72.44 a barrel.

The U.S. paid $28.02 billion for all types of energy-related imports, up from $27.60 billion in May.

Imports of foreign-made consumer goods like pharmaceuticals, toys and apparel surged $3.1 billion. Auto and related parts imports jumped $1.29 billion, while purchases of foreign-made capital goods such as computers rose $462 million. Food and feed imports increased $33 million.

Imports of industrial supplies decreased $186 million in June, however, amid declines in fuel oil and other petroleum products.

Breaking down exports, U.S. sales abroad of capital goods fell $1.43 billion, with declines across most products. Exports of industrial supplies, such as fuel oil, decreased $1.01 billion. Consumer goods exports increased marginally by $123 million in June, while auto exports grew by $233 million.

Meanwhile, exports of food, feed, and beverages went down by $310 million.

The White House is intensifying its attacks on Republicans, after Democratic leaders on Capitol Hill publicly criticized the administration for not doing more to help them retain their majorities.

In his Saturday radio address, President Barack Obama accused “a partisan minority in the Senate” of blocking legislation aimed at helping small businesses and the unemployed. Vice President Joe Biden, discussing November’s midterm elections on ABC’s “This Week” Sunday, declared: “We’re going to shock the heck out of everybody.”

“What I believe, what the president believes—we’re going to win the House and we’re going to win the Senate,” he said.

Those comments contrasted with those of White House press secretary Robert Gibbs last week that enough seats were in play this fall that Democrats could lose their House majority. House Speaker Nancy Pelosi (D., Calif.) and other Democrats publicly berated Mr. Gibbs for his remarks, and pressured the White House to take a more active role in trying to re-elect Democrats this November.

White House Chief of Staff Rahm Emanuel said in an interview Sunday that the shift has been ongoing for some time and wasn’t prompted by the blowup. The president will focus in the coming days on themes appealing to the economically battered electorate, he said, including policies aimed at keeping jobs in the U.S.

In coming weeks, the president will expand his push to create clean-energy jobs to include more traditional industries such as automobiles and railroads. “Made in America” will become the “big theme,” Mr. Emanuel said.

On Monday, the president will appear with unemployed workers to press the Senate to pass an extension of expired unemployment benefits. On Wednesday, he is set to hold a rally at the Ronald Reagan building in Washington, where he will sign the newly passed financial regulations bill, again featuring “real people” positively affected by the law, White House aides said.

ReutersPresident Barack Obama and his family return to the White House Sunday after a weekend in Maine.

Mr. Obama will also seek Senate passage of proposals to change tax provisions that he says encourage businesses to ship jobs overseas, Mr. Gibbs said Sunday. The president will hold a big-dollar fund-raiser late this month in New York City

“You can call it tough, but there’s a clarity of choice there,” Mr. Emanuel said. “One party wants to go forward and tackle these problems. One wants to repeal and repeat the problems of the past.”

Republican aides said voters have already turned against the president’s health-care and economic-stimulus plans, and the just-passed financial regulatory bill is unlikely to change any opinions. They said Republicans also supported extending expired unemployment benefits but they want to pay for it with budget cut elsewhere.

“The increasingly harsh partisan rhetoric from the Obama White House makes clear they are not only very nervous about the upcoming election, but it’s a recognition that they can’t run and win on their own agenda,” said Brian Walsh, spokesman for the National Republican Senatorial Committee.

Republicans still hold the whip hand, with the unemployment rate at 9.5%, surging government debt, disheartened Democratic voters and energized conservatives.

Appearing on NBC’s “Meet The Press” Sunday, the heads of the Democratic congressional campaign committees, Sen. Robert Menendez of New Jersey and Rep. Chris Van Hollen of Maryland, pressed Republicans to say what policies a GOP majority in Congress would push.

Their Republican counterparts, Sen. John Cornyn and Rep. Pete Sessions, both of Texas, didn’t offer specifics. Mr. Sessions said Republicans would balance the budget and “empower the free-enterprise system.” Mr. Cornyn said they would replace the health-care law with “commonsense health-care reform.”

The two focused on the Democrats’ record under Mr. Obama. “To all the bad ideas [voters] hear coming out of Washington today, ‘no’ is a good start,” Mr. Cornyn said.

Republicans have jumped on what Mr. Boehner called “a full-scale civil war” between the White House and Congress. They depicted Democrats as in disarray, even as Democrats approved the most far-reaching overhaul of financial regulations since the Depression.

The White House is moving to repair the breech. “There’s an awful lot of shared anxiety and it feeds on itself,” White House adviser David Axelrod said in an interview.

Some House Democrats have speculated privately that Mr. Obama wouldn’t mind if Republicans took over the House, since a GOP Congress could help his re-election prospects.

“I wanted to put an end to a growing rumor that the president doesn’t want the House, only the Senate, and feels he can get more done with a split Congress,” Rep. Bill Pascrell (D., N.J.) said, explaining his criticism last week of the White House. “I don’t believe that’s true for a moment, and I thought it should be brought to a head.”

Mr. Van Hollen on Sunday said the November elections would be interpreted as a referendum on the president, “whether they like it or not.”

Anxiety is running particularly strong in the House, where the Democratic majority is more endangered and many House members feel mistreated by the Senate. House Democrats have passed a series of bills on energy and joblessness, including extending now-expired unemployment benefits, only to see them stymied in the Senate.

“There is a sense that we’ve been doing everything we can to pass the White House’s agenda, but then the White House doesn’t provide the muscle to close the deal in the Senate,” said a House leadership aide.

Relations between the White House and Democrats appear to be on the mend. Mr. Biden said Democrats are changing the course of the election by drawing contrasts with their Republican rivals.

“I don’t think the losses are going to be bad at all,” he said.

—Laura Meckler contributed
to this article.

Write to Jonathan Weisman at jonathan.weisman@wsj.com and Naftali Bendavid atnaftali.bendavid@wsj.com

Delray company takes on mission to certify products ‘Made in U.S.A.’

Wall Street Journal

By ANDY PASZTOR And DANIEL MICHAELS

Thales SA of France scored a major victory Tuesday over Lockheed Martin Corp., as a Thales-led partnership won a roughly $2.1 billion contract to build a fleet of communications satellites for Iridium Communications Inc.

Iridium also plans to spend a total of $800 million to launch the constellation of 72 satellites and for some ground upgrades, but details haven’t been announced.

The satellite award gives a significant boost to efforts by Thales to expand both its U.S. commercial and defense businesses. It also is a big blow to Lockheed, which played a major role in manufacturing Iridium’s current low-earth-orbit communications network. Lockheed was widely viewed as the Pentagon’s preferred provider of the next-generation satellite system, industry officials said. The Pentagon is a major customer of the voice-and-data services supplied by Iridium.

At a time when global commercial-satellite orders are climbing only gradually and Pentagon investments in new, big-ticket space projects have nearly dried up, Lockheed’s management had been counting on the Iridium job to avoid production cutbacks. Lockheed recently reorganized its satellite business in a bid to wrest more synergy from its commercial and military satellite lines.

The satellite-production contract, which was awarded to Thales Alenia Space, a Franco-Italian joint venture controlled 67% by Thales, includes nine spare satellites. At least 40% of the work is slated to be done in North America. Boeing Co. is part of the winning team, and other U.S. subcontractors are expected to be added.

The Thales venture was established in 2005 by the Alenia space unit of Italy’s Finmeccanica SpA and French telecommunications giant Alcatel-Lucent SA, but ownership changes since then have madeDassault Aviation SA the second-biggest shareholder in Thales, with a 26% stake, after the French state, which holds 27%.

The new satellite fleet, dubbed Iridium Next, is slated to be launched between 2015 and 2017, as Iridium’s current satellites reach the end of their useful life. Industry officials consider it the single largest commercial-satellite project signed in the past decade or likely to be awarded for at least the next several years.

Matt Desch, chief executive of Iridium, said in an interview that the Thales-led team offered a “strong technical proposal married with a strong financing package.” The French export-credit agency has agreed to provide up to $1.8 billion in loan guarantees. Lockheed sought to remain competitive by offering its own financing package backed by the U.S. Export-Import Bank.

Iridium has been growing rapidly, and now has about 360,000 subscribers world-wide, but the McLean, Va., company has been bedeviled by doubts about its survival from some quarters on Wall Street.

According to Mr. Desch, the satellite-replacement contract should answer those doubts and any other questions about Iridium’s prospects.

The job is an important boost for Thales, which is emerging from months of management upheaval. Roughly 10% of the company’s overall annual revenues are tied to the U.S., with the Pentagon and other U.S. government customers accounting for about $1.3 billion in sales. Dassault and the French state have put pressure on Thales to boost its financial performance, and winning U.S. orders is part of that effort.

In December the company announced a reorganization to boost its margins. It blamed continued pressure from soft airline markets, constrained defense spending and a weak dollar for its disappointing returns. Thales said it planned to tighten control over program management by reorganizing around three regions and seven divisions, holding each region accountable for profit-and-loss accounts.

Reynald Seznec, CEO of the Thales venture, said “we are a global player, and space is a global market.” Thales hopes, among other things, that a weaker euro and extensive production arrangements in the U.S. will help improve the venture’s price competitiveness with U.S. customers.

The contract announcement comes amid increasing competition and expected consolidation among mobile satellite-services providers. Iridium’s revenue has been growing at an annual clip of about 15%, though rivals such as London-based Inmarsat Plc also are gearing up to renew their fleets and step up challenges to the U.S. company in certain markets

Last year Dassault Aviation pushed to exert control over its holding in Thales by installing a CEO of its choosing. Longtime Thales chief Denis Ranque, who had won plaudits for his decade-long restructuring and expansion of the company, resisted replacement. A boardroom fight and its spillover consumed Thales for much the year after Luc Vigneron was placed at the helm.

Iridium’s selection of Thales Alenia Space is something of a vindication for Mr. Ranque’s strategy of pushing to expand U.S. sales. Thales initially faced suspicion in the U.S. due to long-running Franco-American friction on security issues. But industry officials said relations with the Pentagon have improved. The French company is seeking to increase its cooperation with U.S. prime contractors, and its U.S. aerospace unit is looking to establish more of a recognizable corporate identity.

In 2001 Thales and U.S. defense contractor Raytheon Co. formed the first major trans-Atlantic security joint venture, although the operation focused on sales outside the two companies’ home markets. Over the years, Thales has won many contracts from the Pentagon for specialized communications and military equipment, but was rarely the leader in Pentagon projects.

Lockheed Martin officials previously felt they were ahead in the competiton, but on Tuesday a company spokesman said they were “greatly disappointed with the contract decision.” The Lockheed spokesman added: “We will continue to provide our valued customers the best total systems solutions in the industry.”

Tim Farrar, a Northern California-based industry consultant familiar with the market segment, said Iridium and head-to-head rival Globalstar Inc. together “are investing so much money on new satellites that it’s hard to see how both companies can meet” the expectations of investors for returns. “Possibly, neither will succeed.” But at the same time, according to Mr. Farrar, “it’s great news for users” of such systems, particularly since Iridium is the only viable competitor to Inmarsat for certain services. Globalstar, based in Milpitas, Calif., four years ago signed a contract with what was then Alcatel Alenia Space to replace its fleet of low earth-orbit satellites, with the first batch slated to be launched later this year.

Reflecting the intense cost pressures on satellite suppliers, industry officials said the satellite-making arm of New York-based Loral Space & Communications Inc. dropped out of the Iridium competiton months ago, apparently after concluding that it couldn’t make any money if it won the contract.

Write to Andy Pasztor at andy.pasztor@wsj.com and Daniel Michaels at daniel.michaels@wsj.com

ELS

By Chris Buckley and Glenn Somerville

BEIJING (Reuters) – China struck a conciliatory note in talks with the United States on Monday by vowing to spur domestic demand and keeping a guarded opening to exchange rate reform, which the Obama administration says is needed to rebalance the global economy.

The United States treaded softly on the subject and welcomed Beijing’s long-standing pledge to reform the yuan as the two sides opened their second Strategic and Economic Dialogue.

But both countries also made clear that a stronger Chinese currency was not enough by itself to narrow the whopping U.S. bilateral trade deficit that has fueled tensions between them at a time when the global economic recovery remains fragile.

While Chinese President Hu Jintao broke no new ground on the yuan dispute, he set an amicable tone for the two days of talks during which the world’s biggest and third-biggest economies will seek to steady their relations.

“China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual,” he said. The renminbi is another name for the yuan.

Hu said his government wanted to expand domestic demand to create more balanced growth, something that Washington — worried about its yawning trade deficit with China — has also advocated.

Treasury Secretary Timothy Geithner said the Chinese government was moving in the right direction on the yuan, which has been effectively pegged to the dollar since the global financial crisis worsened in mid-2008.

“We welcome the fact that China’s leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda,” he said.

Trying to press the case that appreciation would be in China’s own interest, Geithner said that a more market-driven exchange rate would help suppress inflation while also driving private firms to move up the value chain.

TRADE POLICIES

China and the United States signaled that there could be progress on two other trade-related policies that have been additional irritants in their relations.

China said that it was working to resolve the concerns of foreign companies about an “indigenous innovation” program that the United States has said was unduly restrictive and a concern on par with the yuan.

And Chinese Commerce Minister Chen Deming said he was optimistic that the United States would loosen controls over high-tech exports, a move that would go a small way to balancing their trade ties.

The talks also touched on Europe’s debt woes, with both sides saying that they were cautiously optimistic that any fallout would be limited.

“The general view was that the pace of the global economic recovery will be basically maintained,” People’s Bank of Governor Zhou Xiaochuan told a news conference.

The one slight point of open discord were U.S. calls for a tougher line against North Korea over an alleged sinking of a South Korean warship, contrasting with China’s appeals for restraint.

Tensions flared between Beijing and Washington in the first months of 2010, when China denounced U.S. criticism of its Internet censorship, Washington’s arms sales to Taiwan, and President Barack Obama’s meeting with the Dalai Lama, Tibet’s exiled leader.

Beijing considers Taiwan a part of its territory, and Hu said on Monday that it was important for countries to respect one another’s sovereignty.

Beijing officials have said they want only “quiet discussion” of U.S. complaints that the Chinese currency is held too low in value, giving Chinese manufacturers an unfair advantage.

The Obama administration so far appears willing to go along in the hope that a quieter approach will give Beijing more political space to let its currency appreciate.

The annual U.S. trade deficit with China fell to $226.8 billion in 2009 from a record $268.0 billion in 2008. But the Obama administration is keen to lift exports, and the deficit remains a point of friction with Beijing.

(Additional reporting by Arshad Mohammed and Doug Palmer; Editing by Ken Wills)

Beijing wants to create own competitors

Joe Mcdonald, AP Business Writer

BEIJING (AP) — U.S. leaders want China’s clean energy boom to drive technology exports and are sending a sales mission to Beijing this week. But Beijing wants to create its own suppliers of wind, solar and other equipment and is limiting access to its market, setting up a new trade clash with Washington and Europe.

China passed the United States last year as the biggest clean power market, stoking hopes for Western sales of wind turbines, solar cells and other gear. But U.S. and European companies find that while Beijing welcomes foreign technology, it wants manufacturing done here and know-how shared with local partners. In the wind industry, foreign suppliers with factories in China say they are shut out of major projects.

“China is very keen on being able to depend on themselves,” said Frank Haugwitz, a renewable energy consultant in Beijing.

U.S. Commerce Secretary Gary Locke says clean energy sales to China can help fulfill President Barack Obama’s pledge to double U.S. exports over the next five years and create 2 million jobs. Locke is leading a group of 24 American suppliers to Beijing and Shanghai this week to drum up business.

“There is an incredible opportunity for companies all around the world to help China meet its energy goals of reducing greenhouse gas emissions, becoming more energy efficient,” Locke said in Hong Kong Sunday at the start of the trade mission.

“China, given the incredible challenges that it has, should be, in my view, taking the best technology from wherever — whether it’s China, the United States, Europe, Japan or anywhere else,” he said. “Of course, we believe that in many areas, the United States is the world’s leader in some of this technology.”

But Chinese leaders want clean energy to be one of a series of emerging industries with their companies playing a leading global role. They are using regulations to ensure the bulk of Chinese sales go to local producers.

“There is a clash there that I think is going to become more and more prominent unless both sides come to some agreement,” said Jim McGregor of APCO Worldwide Inc., a consulting firm, and a former chairman of the American Chamber of Commerce in China.

China already is embroiled in an array of disputes with Washington, Europe and others over currency, trade in goods from steel to shoes to chicken and Beijing’s industrial policies that favor Chinese companies in areas including computer security and telecoms at the expense of foreign competitors.

Washington and Beijing have so far avoided a formal dispute over clean energy and have pledged to cooperate in research.

The potential Chinese market is huge: Beijing invested $34.6 billion in renewable energy last year, nearly double U.S. spending of $18.6 billion, according to a report by the Pew Charitable Trusts.

Foreign suppliers range from General Electric Co. and Europe’s Siemens AG to Denmark’s Vestas Wind Systems A/S and smaller startups. Products run the gamut from 20-story-tall wind turbines to generators powered by chicken manure.

“Low-carbon development in China represents an enormous opportunity for American businesses,” said David Sandalow, an assistant U.S. energy secretary, in an April statement to the U.S.-China Economic and Security Review Commission.

The biggest impact of China’s industrial curbs has been in wind. Beijing has declared it a strategic industry and wants to build local turbine producers such as Goldwind Science & Technology Ltd. and Sinovel Wind Co. into global players. Chinese companies also get grants and tax breaks to develop solar, biomass, fuel cell and other technology.

The foreign share of China’s wind turbine market plunged from 70 percent in 2005 to 12 percent last year, according to the European Union Chamber of Commerce’s Renewable Energy Working Group. The chamber complains that Chinese authorities help local companies by basing purchases on upfront prices and ignoring a project’s lifetime cost, where more durable foreign equipment wins.

Beijing has aggressive plans to promote renewable energy to curb pollution and reliance on imported oil and gas, which communist leaders see as a strategic weakness.

A 2005 government plan called for at least 15 percent of China’s power to come from wind, solar and hydropower by 2020.

“China is emerging as the world’s clean energy powerhouse,” said the Pew report.

Beijing has faced complaints by the United States, Europe and others over its efforts to promote Chinese companies and press foreign suppliers to hand over technology in other areas including computer security and mobile phones.

Until last year, Beijing required that wind turbines sold in China contain 70 percent Chinese-made parts. That rule was scrapped in September but only after GE, Vestas and others had set up factories in China.

Beijing can limit access to government-financed projects because it has yet to sign the Government Procurement Agreement, a treaty that extends World Trade Organization free-trade rules to official purchases and would require it to treat suppliers equally.

In a written response to questions, the U.S. Embassy in Beijing said Washington has not received formal complaints from American companies about China’s wind policies and they are not considered a trade issue.

In solar power, China already is a top exporter of photovoltaic cells but its factories rely on foreign-made production machinery. Beijing is promising Chinese companies support to develop their own.

“This dependency is something China would like to reduce,” said Haugwitz.

Beijing’s vision of the foreign role in its industry is reflected in a plan by Phoenix, Arizona-based First Solar Inc., the leading maker of solar cells, to build the world’s biggest solar power project on 25 square miles (65 square kilometers) of China’s northern grasslands.

First Solar says it will manufacture equipment in China using new “thin film” technology that local rivals have yet to develop and will train Chinese partners.

“The government’s position is, you can come in but you have to offer us something more advanced than we already have or it’s going to be more difficult,” said Damien Ma, an analyst for Eurasia Group in Washington.

Industry analysts point to Chinese-foreign joint research as a possible way to ease trade strains and maintain access to China’s market.

The U.S. and Chinese governments agreed to last year to launch a joint $150 million research venture on clean vehicles, more efficient buildings and other technologies.

Last year, Germany’s SolarWorld AG agreed to provide technology to China’s Suntech Power Inc., the second-biggest maker of solar cells after First Solar. General Motors Co. and others have research ventures with Chinese companies and universities on alternative fuels and other fields.

Beijing’s need for technology means foreign companies are likely to continue to get market access in exchange for it, Ma said.

“There is no way they are going to fully close the sector,” he said.

Associated Press writer Min Lee in Hong Kong contributed to this report.

Congressman Mark Schauer

Mark Schauer
Contact: Zack Pohl 517-780-9075

Schauer announces legislation to block Chinese goods from U.S. government contracts

Chinese-made promotional materials for U.S. Census demonstrate how unfair trade policies hurt American workers, business

Today Congressman Mark Schauer (D-MI) announced legislation he’s planning to introduce that would block Chinese goods from U.S. government contracts until American companies are treated fairly in China. At a press conference this morning, Schauer pointed out promotional materials for the U.S. Census that were made in China as an example of how unfair trade agreements are hurting American businesses and workers.

“The goal of the Census is to perform an accurate head count of American citizens to ensure our communities get their fair share from Washington,” said Schauer. “While I fully support this effort, it’s shameful that our tax dollars are being spent on promotional materials that were made in China instead of being produced by American businesses and workers. That’s why I’m introducing legislation to stop Chinese firms from bidding on U.S. government contracts until our companies are treated fairly in China.”

Currently, goods that were produced by Chinese firms are being used for state and federal government contracts in the Unitedd States across multiple industries – such as manufacturing, construction and renewable energy – instead of goods prod uced by American workers and businesses. Schauer’s bill would level the playing field for American businesses and make sure taxpayer-funded projects create jobs in America, not China.

According to a recent report from the Economic Policy Institute, 2.4 million American jobs have been lost or displaced as a result of the burgeoning trade deficit with China since it joined the World Trade Organization (WTO) in 2001. During that time, the State of Michigan lost 67,800 jobs, including 4,700 in the 7th district alone, due to unfair trade with China.

The use of the Chinese Renminbi in Hong Kong is on the increase.

Over the last ten years, the Renminbi (RMB) or yuan, has been slowly gaining influence in the markets that surround mainland China. And about one year ago Hong Kong, a major commerce and trading hub, introduced a new trade settlement that allowed Hong Kong business’ to use the RMB as a trading currency.

Three Stages for Yuan

With the rapid development of China’s foreign trade, the RMB is increasingly flowing out of China. Although it still lacks broad international circulation, many analysts believe the Yuan should eventually become a major international trading currency.

In a China Daily interview (clip below), Dr. Billy Mak, Associate Professor in Finance at Hong Kong Baptist University believes this will happen in three phases: 

1. The yuan should be used as a pricing currency and a settlement currency for the international trade, because right now China is one of the biggest partner in international trade, so its quite natural to make the RMB as a key currency for the pricing and the settlement for the trading. 
2. Using the RMB as an investment vehicle similar to the euro and the US dollar. 
3. The third phase will be for the RMB to be “internationalized” becoming an international foreign currency reserve just like the US dollar, the euro and sterling.

According to Mak, we are in the early stage of phase one since RMB is used as a trade settlement currency just last year.

Asian Monetary Fund Launched

Asia became keenly aware of the need for a liquidity safety net following the Asian financial crisis that hit the continent in 1997 and 1998.  Wary of a dollar crisis, it is in China’s interest to promote its own currency as alternatives.

As part of the strategy to wean itself off the dollar and the dependency of exports to the U.S., China, together with Korea, and Japan, also became a member of a regional fund lauched just this month by the ten ASEAN (Association of Southeast Asian Nations) member nations.

The $120 billion fund known as the Chiang Mai Initiative Multi-lateralization Agreement has come into effect to act as a safety net for member countries in the case of an urgent need of liquidity (e.g. a U.S. dollar crisis).

Although not quite the status of an Asian Monetary Fund (AMF) yet, one thing for certain is that the region now has its own financial safety net which can perhaps one day grow to become an AMF.

Lines Blurred – Capitalism & Communism    

While China seems more focused on promoting bilateral trade agreeements and forming economic alliance, the United States, in sharp contrast, appears to be alienating major trading parterners with a weaker currency than its own, and feverishly interfering with private companies’ operations.

While there’s an ongoing debate about the two systems–at the moment–it seems this unprecedented global financial crisis is nudging the US towards much despised centralized system, while China is becoming much more capitalistic.

BEIJING (Reuters) – China said on Wednesday it would not waver in sticking to a stable exchange rate and was being made a “scapegoat” after Congress threatened to seek duties on Chinese goods unless it revalues its yuan.

The heat in the long-running dispute over China’s exchange rate regime is rising quickly, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to press Beijing to let its yuan currency rise.

The Managing Director of the International Monetary Fund, Dominique Strauss-Kahn, added to the pressure on Beijing, saying that the yuan is undervalued.

Focusing on the yuan will not help to solve problems in the Sino-U.S. bilateral trade relationship, a Chinese Commerce Ministry official told Reuters.

“We oppose the over-emphasis on the yuan’s exchange rate,” the official said, when asked about the bill. “The yuan’s exchange rate is not a magic potion for solving global economic imbalances.”

In Geneva, a senior China diplomat said the U.S. lawmakers were unfairly blaming Beijing for their own woes.

“They should not blame the problems they have by finding a scapegoat in China,” He Yafei, China’s new ambassador to the United Nations in Geneva, told a briefing.

The apparent hardening of positions drove the yuan to a three-week low against the dollar in the offshore forwards market, implying just 2.4 percent of appreciation over the next 12 months.

Ding Zhijie, a professor at the University of International Business and Economics in Beijing, said U.S. pressure on the exchange rate was “totally counter-productive.”

“With such heavy pressure from the United States, any move would look like giving in to foreign pressure — for both the Chinese government and the Chinese public, it would be unacceptable,” said Ding, who provides advice to the government.

China’s official Xinhua news agency said Washington was making Beijing unfairly carry the blame for U.S. economic woes ahead of Congressional elections.

“With the U.S. mid-term elections looming, electoral politics have again become the priority of the Obama administration,” said the commentary.

Focusing on China’s yuan currency can create “a clear target, offering an explanation to the unemployed of why they lost their jobs,” it said.

SHIFTING CIRCUMSTANCES

The World Bank weighed into the debate, recommending a stronger exchange rate and a tighter monetary policy to restrain inflation expectations and asset bubbles in China.

The case for greater exchange rate flexibility had, on balance, increased over the last year, Ardo Hansson, the bank’s lead economist in Beijing, told a news conference.

“If there is a concern about inflation, if there is a concern about sensitive capital inflows, this is part of the arsenal for dealing with these policy issues,” he said.

IMF chief Strauss-Kahn said a stronger focus by China on “domestic-led growth” would help the yuan appreciate.

“Some currencies in Asia are undervalued, especially the renminbi,” he told a committee of the European Parliament in Brussels. The renminbi is another name for China’s yuan.

Beijing’s stance on the yuan had been consistent and was unchanged, the Chinese official in Beijing said.

He cited Premier Wen Jiabao and Commerce Minister Chen Deming, who have said a stable yuan has contributed to both the Chinese and the global economic recovery.

“We have repeated ourselves multiple times. And we cannot be any clearer,” the official said.

FRICTION OVER DEFICIT

China has in effect pegged the yuan near 6.83 to the dollar since mid-2008 to cushion its exporters from the global crisis.

Rising inflation and recovering exports had fueled market expectations that Beijing was on the cusp of resuming the gradual path of appreciation followed for three years starting in mid-2005.

Wen on Sunday recommitted China to pushing ahead with reform of the yuan’s exchange rate mechanism, leaving the door open to reintroducing exchange rate flexibility if it suits Beijing.

But the premier also said that the yuan was not undervalued and said calls for appreciation were tantamount to protectionism.

The U.S. trade gap with China narrowed to $226.8 billion in 2009 from a record $268.0 billion in 2008.

But with the administration of President Barack Obama keen to expand exports and jobs, the deficit remains a point of friction between the two powers, which have also been at odds over human rights, Tibet and U.S. arms sales to Taiwan.

The U.S. Senate bill, a rare show of bipartisan accord, adds to pressure on Obama, whose administration must decide whether to label China as a currency manipulator in a semi-annual Treasury Department report due on April 15.

Many U.S. lawmakers, with strong backing from economists, believe the yuan is undervalued by at least 25 percent, giving Chinese companies an unfair edge in trade — one seen as more critical now that the U.S. economy is struggling to recover from the worst downturn since the 1930s.

(Additional reporting by Zhou Xin, Alan Wheatley and Chris Buckley in Beijing, Jan Strupczewski in Brussels and Jonathan Lynn in Geneva; Editing by Jeremy Laurence and Sanjeev Miglani)