Chinese President Hu Jintao has signalled that China is not about to budge on its exchange rate policy despite growing pressure, and has instead called on the United States to follow an internationally responsible monetary policy.

Hu travels to Washington this week for a state visit after a year of mounting tensions with the US. But at this stage, there are few signs of compromise on either side.

In an interview on the eve of the talks, Hu raised China’s concerns about the US Federal Reserve’s massive bond-buying program. Beijing alleges that by printing money, the US central bank is pushing the US dollar lower, and causing money to flood into developing countries, forcing their currencies higher, fuelling inflation and creating asset bubbles.

In a written response to questions from The Wall Street Journal and the Washington Times, Hu reminded the US of its responsibility as the custodian of the world’s global currency. He noted that US monetary policy “has a major impact on global liquidity and capital flows”. As a result, he said, “the liquidity of the US dollar should be kept at a reasonable and stable level.”

US President Barack Obama, has previously defended the Fed’s bond buying program, saying that US central bank’s mandate is to foster US economic growth, which benefits the world. Washington argues that China has only itself to blame for rising inflationary pressures, because it is keeping its currency artificially low in order to give its exports an unfair advantage.

In a television interview last month, Ben Bernanke, the boss of the US central bank, said that if China fixed its currency to the dollar, then it had to essentially follow the same monetary policy as the US.

“Now, the United States needs and has a relatively supportive monetary policy. China is growing very quickly. They’re risking inflation by importing US monetary policy. And that that’s a problem for them,” he said.

Last week, US Treasury Secretary Timothy Geithner repeated the US line that a stronger yuan was in China’s interests because it would cut the price of imported goods, and reduce inflationary pressures.

But Hu rebuffed these arguments in his latest interview. He said China had already taken steps to curb inflation, including interest rate rises. What’s more, he said, a number of factors were responsible for setting exchange rates, including global trade and investment flows.

“In this sense, inflation can hardly be the main factor in determining the exchange rate policy,” he said.

Hu also voiced Chinese concerns about the dollar-centric global currency system, in which the US dollar playing a dominant role in settling global trade, and in international finance. Beijing is worried that the massive US budget deficit, combined with money printing by the US central bank will cause the US dollar to fall sharply. This would erode the value of China’s foreign exchange reserves, which totalled $US2.85 trillion at the end of last year. Six months ago, the Chinese central bank called for the creation of a new international reserve currency “to avoid the inherent deficiencies of using sovereign currencies for reserves”.

In the latest interview, Hu described the current international currency system as “the product of the past.” At the same time, he said, turning the Chinese currency, the yuan, into an international currency “will be a fairly long process.”

This leaves the world facing a very volatile global exchange rate system. As Obama has indicated, the US will continue to give priority to fostering domestic economic activity, at the expense of maintaining a stable currency. And as a result, the US dollar will continue to cede its role as the global reserve currency, but neither the euro, nor the yuan, is in a position to fill the gap.

*This article was originally published on Business Spectator