[ForexNews]

Following a week of meetings of APEC leaders and ministers in Singapore, the focus will shift to China this week as US President Obama visits Shanghai and Beijing. Investors who are expecting Obama to put pressure on his Chinese counterpart over the issue of the Chinese yuan (CNY) are likely to be disappointed. In addition to exchange rates, other issues on the agenda include the need to reach at least some consensus ahead of the UN Climate Change Conference to be held in Copenhagen in December – which seems to be slowly crumbling, as a binding agreement is unlikely.

The joint statement by APEC finance ministers was consistent with the communiqué from the G20 finance minister meetings. The group was cautious about the withdrawal of expansionary economic policies and said that each government should act according to its own domestic conditions. The statement promoted free trade and denounced protectionism. The issue of global imbalances should be resolved through high savings in current-account-deficit economies and more spending in economies running a surplus. Meanwhile, a brief mention of exchange rates was buried in the statement: “We will undertake monetary policies consistent with price stability in the context of market oriented exchange rates that reflect underlying economic fundamentals.” This does not put much pressure on Asian economies to let their currencies appreciate. Exchange rates were not even mentioned in the APEC Economic Leaders' joint statement. Meanwhile, much of the bat-swinging came from the IMF, with its chief, Strauss-Kahn saying most Asian currencies are undervalued.

It is difficult to envisage President Obama playing hardball on the value of the CNY in Beijing's home court this week, particularly with more pressing issues, such as climate change, on the agenda. Most likely, Obama will gently remind China that a flexible exchange rate is in China's best interest for financial stability, and China will politely agree with that statement. Nonetheless, Beijing is likely to remain cautious and keep USD-CNY at the current level until it sees a sustained improvement in export performance. The low base effect from late 2008 suggests that Chinese exports could return to mild positive year-on-year growth before the end of 2009, but they will still be 20% below the peak of activity observed before the global financial crisis started.