US McCormick: China Forex Reversal Would Be 'Counterproductive'

NEW YORK -- It would be "counterproductive" for China to reverse its foreign-exchange reform policy because of short-term challenges to the economy, David McCormick, undersecretary for international affairs at the U.S. Treasury Department, said Tuesday.

Currency reform is "in [China's] best interest," McCormick told an event at the Asia Society in New York. Abrupt moves to overhaul the currency "may be difficult, but the ongoing trend is critical," he said.

China has allowed the yuan to appreciate slowly against the U.S. dollar in recent years, although in recent months it has stalled.

McCormick said he believes the Chinese leadership realizes its interdependence with the U.S. "more than ever before." The most important priority for the Chinese at the moment is that the U.S. economy stabilizes and resumes a growth path, he added.

China itself has the challenges of moving from more export to domestic demand and addressing some of the balances between coastal and inland areas and between urban and rural areas. At the heart of that is greater domestic demand within China, and the Chinese leadership is aware of that issue, he said.

China has acted responsibly with its holdings of international assets throughout this crisis, McCormick said. "Their behavior as a global investors has remained stable throughout this period," he said, adding that there may have been periods in the past when that wouldn't have been the case.

The U.S. government, meanwhile, must provide as much encouragement as possible to attract commercial investments from sovereign wealth funds, he said.

Given the uncertainty that has emerged as a result of the credit crisis over the last three or four months, all investors, including sovereign wealth funds, have pulled back, McCormick said.

Whilst the U.S. government has tried to provide as much certainty and clarity as possible, McCormick acknowledged that if investors feel government intervention may disadvantage their investments they will wait for the dust to settle before making new commitments.

"What we need to do is make sure we are as encouraging as possible so when there is some modicum of stability those investors come back," McCormick said.

There has been talk about sovereign wealth funds contributing to a global liquidity fund managed by an international institution such as the World Bank. McCormick said that while the U.S. would welcome any such decisions, it hasn't been actively encouraging them.

"We have not encouraged them to act in ways other than in purely commercial terms," McCormick said.

These SWFs have gained pace in the last five or six years, both in terms of the number of funds and the amount of assets, and concerns have been raised about their ultimate priorities.

McCormick said that SWFs have been around since 1946 and have an established track record as long-term, passive minority investors that have acted very much along commercial lines. While there may have been instances when some concerns have surfaced, "that's not been the track record to date," McCormick said.

-By Matthew Cowley, Dow Jones Newswires; 201 938 5692; matthew.cowley@dowjones.com