NEW YORK (CNNMoney) -- Now that China's trade surplus has narrowed to just $13.1 billion, do you think that President Hu Jintao and President Obama will just spend next week's visit at the White House talking about the weather?
Don't count on it. This massive trade surplus -- and the fact that the United States still views China's currency as artificially low -- is likely to dominate the talks between the two leaders on January 19.
Obama may rightfully point out that U.S. manufacturers will be at an unfair competitive disadvantage to China as long as the yuan is not trading more freely. A lower yuan makes goods exported by China cheaper.
But at the same time, Hu could counter that China's economic growth is actually slowing and that the trade gap is no longer significant. He could also wryly point out that the Federal Reserve's bond buying program -- the much-maligned QE2 -- may not help the dollar appreciate over the long haul either.
With that in mind, experts (including a top Fed official) don't think that much will change in the near future.
Dallas Fed President Richard Fisher, who visited CNN's New York offices Tuesday for an interview with CNNI's Felicia Taylor to appear on "World Business Today," told me that he doubts China will move too quickly to let the yuan float more freely.
Fisher, who spent time in China serving as an official under both the Carter and Clinton administrations, said that deep down, China still doesn't completely trust the U.S. and that government officials do not want to be pushed around by foreign demands.
"They don't want to be hoodwinked," Fisher said. "China will take their own sweet time to let their currency rise. They will not budge but to relieve some political pressures."
That view is shared by others. And that's a concern as the U.S. still struggles with a high unemployment rate amidst worries that America risks falling behind emerging markets like China in the global economic race.
Jeffrey Bergstrand, a professor of finance with the Mendoza College of Business at the University of Notre Dame, said that the bigger-than-expected decline in China's trade surplus for December is not necessarily the beginning of a trend.
He said China has taken some steps to let the yuan trade more freely but it still should do more to adjust the exchange rate, arguing that the yuan should rise about 5% to 10% a year.
"The yuan will be way undervalued for the foreseeable future and that is more of a problem for the U.S. than China," said Bergstrand. "We are at an historic juncture where economic power is shifting more to developing markets."
That is true. As such, it will be interesting to see just how tough of a stance Obama and others in his administration will take regarding China.
Treasury Secretary Timothy Geithner is likely to discuss the yuan and trade issues in a speech at Johns Hopkins University Wednesday. The presentation is titled "The Path Ahead for the U.S.-China Economic Relationship."
But one thing is certain about that path. The U.S. has to tread carefully on it. Despite irritation about the yuan, Obama and Geithner would be foolish to rankle China too much.
They cannot ignore that China is America's biggest foreign creditor. According to the Treasury, China held $906.8 billion in U.S. debt securities as of October.
The Treasury will release its latest figures on foreign investments on January 18 -- a day before Hu's White House visit. That number will bear watching because it will be the first chance to see how China reacted to the official announcement of QE2.
China obviously can't be thrilled that the Fed's bond buying threatens to devalue their Treasury holdings. So far though, China has merely talked a good game and has not unloaded its bonds as a means of protest.
Milton Ezrati, senior economist with Lord Abbett, an investment firm in Jersey City, N.J., noted that China may have no choice but to keep investing in U.S. debt as long as the yuan is cheap against the dollar -- and as long as the euro debt crisis lingers. There just simply aren't many other attractive options.
But if Tuesday's Treasury number shows a big drop in China's bond holdings, Hu may suddenly have a stronger hand in any talks with Obama about currency manipulation and trade.
"Washington is determined to pressure China on the yuan. Obama has to bring the subject up," Ezrati said. "But the administration probably does have to cool the rhetoric a bit."
-- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Today's featured rates:
MySpace is laying off 500 employees, cutting its staff by 47%. More
Democratic state lawmakers are looking to pass a major tax increase Tuesday before more Republicans take office. State faces major deficit and backlog of unpaid bills. More
Verizon iPhone will go on sale early next month, ending AT&T's run as the phone's exclusive carrier. More
The number of businesses sold rose 3% in 2010, according to online marketplace BizBuySell.com, while the median price fell 6.3%. More
Beware your smartphone. It's becoming one of your most dangerous possessions. More
Screen name (Select one with 3-12 characters; Numbers and letters only)
Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Already have the reset code?
Reset code
New password
Password
Forgot password?
Not a member yet?
Screen name
Password
Type what you see in the grey box
CNNMoney will use the information you submit in a manner consistent with our Privacy Policy. By clicking on "sign up" you agree with CNNMoney's Terms of Service and Privacy Policy and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. (learn more)
This service is temporarily unavailable. Please try again soon.
Thanks!
Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.
Go to your Profile page
Be the first to know when there is breaking financial news with timely alerts delivered straight to your inbox.
Read Full Article »