Chris Giles and Alan Beattie, “China reprimanded by G20 leaders”

China reprimanded by G20 leaders, Financial Times

By Chris Giles in London and Alan Beattie in Washington

Published: March 30 2010 19:05 | Last updated: March 30 2010 19:05

Five prominent members of the Group of 20 leading economies, including the US and UK, sent a coded rebuke to China on Tuesday against backsliding on economic agreements.

In a letter to the rest of the G20 that shows frustration at slow progress this year, the leaders warned: “Without co-operative action to make the necessary adjustments to achieve [strong and sustainable growth], the risk of future crises and low growth remain.”

G20 officials said the letter – signed by Stephen Harper and Lee Myung-bak, the Canadian and South Korean leaders who will chair the group’s two summits this year, Barack Obama, US president, Gordon Brown, UK prime minister, and Nicolas Sarkozy, French president – was an attempt to restore flagging momentum to the international process.

Ottawa and Seoul are concerned that the G20 summits they will host, in June and November respectively, might fail to live up to expectations.

In a move that will irritate China, the five leaders specifically raised the issue of exchange rates in relation to reducing trade imbalances, a topic the G20 avoided in 2009 to help secure agreement at the London and Pittsburgh summits.

“We need to design co-operative strategies and work together to ensure that our fiscal, monetary, foreign exchange, trade and structural policies are collectively consistent with strong, sustainable and balanced growth,” the letter said.

It has been released in the middle of an intense debate in Washington about how the White House should confront Beijing over the perceived strength of the renminbi. Some lawmakers are ratcheting up calls for China to be designated a currency manipulator in a forthcoming report.

Charles Schumer, the third most senior Democrat in the Senate, this week again advocated a bill that would allow the US to include estimates of currency misalignment when calculating anti-subsidy duties to be imposed on imports.

As well as refusing to budge on its currency, China has been obstructing the G20 process this year. It has hampered efforts by the International Monetary Fund to issue a report which Dominique Strauss-Kahn, managing director, told the Financial Times in January would conclude that national strategies for growth around the world “will not add up”.

The leaders’ letter makes reference to the slow progress of this process, urging all G20 members to “move quickly” to “report robustly on what each of us can do to contribute to strong sustainable and balanced global growth”.

The letter also sounded a warning note over the so-called Doha round of global trade talks, which is at a virtual standstill after the collapse of negotiations in 2008.

“With regard to Doha, we need to determine whether we can achieve the greater level of ambition necessary to make an agreement feasible,” the letter said.

http://www.ft.com/cms/s/0/a1e38f96-3c23-11df-b40c-00144feabdc0,s01=1.html

Click Here to Download the G20 Letter

Keith Bradsher, “China Officials Wrestle Publicly Over Currency”

China Officials Wrestle Publicly Over Currency, New York Times
By Keith Bradsher
Published: March 25, 2010

BEIJING — Signs are emerging of conflicting views among China’s leaders over whether to allow the country’s currency to rise against the dollar.

The conflict, which has broken into rare public view, seems to be mainly between China’s central bank and its Commerce Ministry. But how it is eventually resolved could decide the course of trade tensions between China and the United States.

Many experts contend China deliberately undervalues its currency, the renminbi, making Chinese exports more competitive on global markets and creating jobs in China at the expense of employment elsewhere.

The current drama began on March 6 when the governor of China’s central bank stunned analysts by saying that the bank’s policy of keeping the renminbi at a constant exchange rate against the dollar was a “special” response to the global financial crisis.

The new description suggested to many economists that the current value of the renminbi was temporary and that the central banker, Zhou Xiaochuan, was preparing the Chinese public for a stronger renminbi.

But other Chinese officials, particularly at the Commerce Ministry, have fought back in the last two weeks, stoking nationalism and anti-American sentiment by loudly declaring that China would not be told what to do by the United States.

“It seems like they are talking from different perspectives,” said Li Wei, the director of the American studies department at the Chinese Academy of International Trade and Economic Cooperation, speaking of the Chinese officials. He added that he supported the Chinese government’s overall stance of resisting American pressure.

The debate is far from academic. In the coming weeks, the Obama administration faces a series of politically charged deadlines set by Congress to decide whether to continue negotiating with China over currency and trade issues or to take a more confrontational stance and name China a currency manipulator.

If the administration labels China a currency manipulator, it would face further Congressional pressure to impose punitive tariffs on many Chinese goods.

So far, the media-wise Commerce Ministry is trouncing the normally secretive central bank.

Every few days, senior Commerce Ministry officials have spoken out, warning that pressure to let the renminbi rise is “irrational.” The ministry is close to exporters, who are still upset that shipments fell early last year for the first time since China began opening trade in the late 1970s. China’s overall trade surplus was $198.1 billion last year, down from $297.4 billion the year before as global trade shrank during the financial crisis.

The ministry has even taken its campaign to Washington, with Zhong Shan, the deputy minister, giving a speech at the United States Chamber of Commerce on Wednesday morning and telling reporters at the Chinese Embassy on Wednesday afternoon that American pressure for a stronger renminbi “is unacceptable to China.”

These comments have raised a surge of anti-American sentiment in Internet chat rooms and prompted daily headlines on the front pages of Chinese newspapers that China must not “back down.”

Borrowing a page from the playbook of some of the most sophisticated Western crisis management consultants, the ministry even sent to reporters last week the private cellphone numbers of eight Chinese academic experts on Sino-American trade relations. But unlike the Western consultants, the ministry did not ask or warn the academics before giving out their phone numbers.

Some Chinese economists gingerly suggested in the past year that China could find better uses for the hundreds of billions of dollars it spends buying United States Treasuries and other foreign securities to keep the renminbi from rising against the dollar.

That investment in overseas bonds was equal to nearly a tenth of China’s entire economic output last year, even though Treasuries have a return of only 0.13 to 4.76 percent currently. If the renminbi does appreciate eventually, the value of China’s vast foreign reserves will plunge in renminbi terms — a loss for which the central bank would likely be blamed.

Maintaining the current level of the renminbi also means the central bank cannot easily push up interest rates — a move countries normally use to battle inflation.

That may be necessary in China. The economy here is doing so well and China international competitiveness is so strong that inflation is starting to appear. Exporters have more orders than they can fill — although imports have been rising even faster as Chinese companies have stockpiled commodities as a hedge against inflation.

Export-oriented provinces in coastal China raised their minimum wages by 20 percent last week in a desperate bid to attract more workers from China’s increasingly prosperous interior to run factory assembly lines.

These problems have made the central bank unenthusiastic about selling renminbi and buying foreign bonds so as to hold down the value of the currency, people close to the central bank said. But the bank has been reluctant to make its case in public, consistently rebuffing requests for interviews, and now may have missed its chance as the increasingly free Chinese business press has embraced the weak renminbi as a nationalistic symbol of Chinese sovereignty.

In many policy discussions between the United States and China over the past two decades, the Chinese government has seemed to maintain a laserlike focus. American officials in a succession of administrations and Congresses have been more like flashlights pointing in different directions at night.

But in the current debate, American officials have been tightly disciplined — the Treasury, Commerce Department and Office of the United States Trade Representative have said little. Chinese officials, on the other hand, have been vocal and less consistent.

In the United States, the Treasury — and often only the Treasury secretary himself — comments on the dollar. That has helped limit sudden fluctuations in the dollar’s value in currency markets.

But China has no such policy limiting which agencies or individuals can publicly address currency issues. For decades, currency policy has been the purview of the central bank, but the central bank is a politically weak institution. The People’s Bank of China is simply one of many economic policy ministries and even lacks independent authority over monetary policy, unlike the Federal Reserve.

Commerce Ministry officials say that they are following a broader trend in the Chinese government of greater responsiveness to the public. “Our ministry is doing a good job to be more open and more transparent — there is even an office in our ministry responsible for publicizing our policies,” said Chen Rongkai, the ministry’s division director for press.

Sewell Chan contributed reporting from Washington.

http://www.nytimes.com/2010/03/26/business/global/26yuan.html

Stephen Roach, “Blaming China will not solve America’s problem”

Blaming China will not solve America’s problem
By Stephen Roach

Published: March 29 2010 20:33 | Last updated: March 29 2010 20:33

America’s fixation on the “China problem” is now boiling over. From Google to the renminbi, China is being blamed for all that ails the US. Unfortunately, this reflects a potentially lethal combination of political scapegoating and bad economics.

The political pressures are grounded in the angst of American workers. After more than a decade of stagnant real compensation and, more recently, a sharp upsurge in unemployment, US labour is being squeezed as never before. Understandably, voters want answers. It is all because of the trade deficit, they are told – a visible manifestation of a major loss of production to foreign competition. With China and its so-called manipulated currency having accounted for fully 39 per cent of the US trade deficit in 2008-09, Washington maintains that American workers can only benefit if it gets tough with Beijing.

However appealing this argument may seem, it is premised on bad economics. In 2008-09, the US had trade deficits with more than 90 countries. That means it has a multilateral trade deficit. Yet aided and abetted by some of America’s most renowned economists, Washington now advocates a bilateral fix – either a sharp revaluation of the renminbi or broad-based tariffs on Chinese imports.

A bilateral remedy for a multilateral problem is like rearranging the deckchairs on the Titanic. Unless the problems that have given rise to the multilateral trade deficit are addressed, bilateral intervention would simply shift the Chinese portion of America’s international imbalance to someone else. That “someone” would most likely be a higher-cost producer – in effect, squeezing the purchasing power of hard-pressed US consumers.

The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America’s core economic problem is saving, not China. In 2009, the broadest measure of domestic US saving – the net national saving rate – fell to a record low of -2.5 per cent of national income. That means America must import surplus saving from abroad to fund its future growth – and run current account and trade deficits to attract the foreign capital. Thus, for a savings-short economy, there is no escaping large multilateral trade imbalances.

Yes, China is the biggest piece of America’s multilateral trade deficit. But that is because high-cost US companies are turning to China as a low-cost offshore efficiency solution. It also reflects the preferences of US consumers for low-cost and increasingly high-quality goods made in China. In other words, savings-short America is actually quite fortunate to have China as a large trading partner.

No, China is hardly perfect. Like the US, it, too, has a large imbalance with the rest of the world – namely, an outsize current account surplus. Just as responsible global citizenship requires America to address its savings deficiency, the world has every reason to expect the same from China in reducing its surplus saving.

But these adjustments must be framed in the multilateral context in which the imbalances exist. Just as China is one of more than 90 countries with which America runs trade deficits, US-China trade now represents only 12 per cent of total Chinese trade. It is wrong to fixate on a bilateral solution between these two nations to address their multilateral imbalances.

Yet some of America’s most prominent economists are claiming that a revaluation of the renminbi vis-à-vis the dollar would not only create more than 1m jobs in the US but that it would inject new vigour into an otherwise anaemic global recovery. Economists should know better. Changes in relative prices are the ultimate zero-sum game – they re-slice the pie rather than expand or shrink it.

Currency, or relative price, adjustments between any two nations are not a panacea for structural imbalances in the global economy. What is needed, instead, is a shift in the mix of global saving. Specifically, America needs deficit reduction and an increase in personal saving, while China needs to stimulate internal private consumption.

Washington’s scapegoating of China could take the world to the brink of a very slippery slope. It would not be the first time that political denial was premised on bad economics. But the consequences of such a blunder – trade frictions and protectionism – would make the crisis of 2008-09 look like child’s play.

The writer is chairman of Morgan Stanley Asia and author of The Next Asia

Corinna Petry, “Council disputes study tying yuan manipulation to US job losses”

Council disputes study tying yuan manipulation to US job losses, American Metal Market
By Corinna Petry Published: Mar 26 2010 6:11PM

CHICAGO — While acknowledging that Chinese central government policy trends have caused concern around the world and must be addressed, the U.S.-China Business Council has called into question the credibility of a study by the Economic Policy Institute (EPI) drawing a direct and damaging link between the nation’s alleged currency manipulation and the loss of 2.4 million U.S. jobs, especially manufacturing employment.

The EPI study showed the U.S. metals industry alone lost nearly 150,000 jobs between 2001 and 2008 due in no small measure to the Chinese government’s manipulation of its currency. U.S. Sens. Lindsey Graham (R., S.C.) and Charles Schumer (D., N.Y.) have publicly supported the EPI’s findings as it relates to legislation they brought forward in the past couple of weeks (AMM, March 25). Their bill would allow the U.S. Commerce Department to impose countervailable duties on Chinese imports if the
imports are unfairly priced due to currency manipulation.

“Their methodology is horribly flawed,” council president John Frisbie said Friday in an interview.”(EPI’s) fundamental assumption is that all (Chinese) imports would be made in the United States. That’s not even close to being right.” For example, the United States hasn’t produced television sets in decades, instead importing them first from Japan, then South Korea and now China. Those imports “do not represent goods that would be made in the U.S. The data is overstated, which undermines the study,” he said.

The council is made up of 220 U.S. companies, with roughly half split between manufacturing and service industries, Frisbie said.
“We’ve never found a credible methodology that ties trade to jobs. To balance the debate, what we use is U.S. exports to China. China is a significant export market for the U.S. now—the third largest behind Canada and Mexico—and will be as China continues to grow,” he said. “Even last year, which was a down year for trade, our exports to China were flat with 2008, or about $70 billion, while U.S. exports to the rest of world were down 19 percent. China is outperforming (other nations) as a destination for U.S. goods. Chinese currency has never (before) been cited as a barrier to access, so we should not believe Chinese currency should affect trade flows or the U.S. trade deficit.”

The United States should continue to use its tariff powers—”anti-dumping rules for example”—to deal with unfair trade, Frisbie said. “If there are increases in anti-dumping orders, then that is a way of addressing it. There are ways to go after (trade violations) that are legally based. This study is not done this way,” he added.

“There are growing concerns about policy trends in China that need to be addressed. One is the currency issue: We should let exchange rate value fairly, but that won’t impact imports much,” Frisbie said. “The second issue is the policies in China that limit access (for U.S. exporters) to China’s government procurement market.” Frisbie noted that during the 2005-08 period during which China did allow the yuan to appreciate 20 percent against the dollar, the U.S.-China trade deficit continued to grow. “So the link is not there,” he said.

Rather, the link is between U.S. manufacturing productivity and the loss of jobs in the sector. “The U.S. makes more with fewer people, primarily because of productivity and technology advances,” Frisbie said. “The answer is not to build walls around the U.S. to isolate ourselves from our growing export opportunities with China,” especially with United States still emerging from the economic downturn.

On the other hand, “good economics suggest that it is probably time for China to resume exchange rate movement, and my guess is that will likely happen if politics do not get in the way,” he said, adding that when China is found to be “flouting international trade rules, we should first seek direct dialogue to resolve the issue.”

AMM

Zhong Shan, “U.S.-China Trade Is Win-Win Game”

U.S.-China Trade Is Win-Win Game, Wall Street Journal
Zhong Shan
March 26, 2010

A sound and stable China-U.S. economic and trade relationship is more important than ever.

China-U.S. trade and economic cooperation has generated huge and real benefits for the United States, while China has been gaining a lot from it as well. In 2009 China jumped to become the third biggest market for U.S. exports. American companies have cumulatively invested over $62.2 billion in 58,000 projects in China and reaped bumper harvests. Their profits in China amounted to nearly $8 billion in 2008 alone.

Since the outbreak of the international financial crisis, China has been supporting the efforts of the American people to tackle the crisis. On the one hand, China has increased imports from the U.S. While overall U.S. exports dropped 17.9% in 2009, exports to China hardly decreased. Many U.S. manufacturing firms have found comfort in the Chinese market as a shelter against the global financial storm.

On the other hand, good value-for-money, labor-intensive goods imported from China have helped keep the cost of living down for Americans even when they become increasingly cash-strapped. Without consumer goods from China, the U.S. price index would go up an extra two percentage points every year.

How should we approach the trade deficit, a heated topic in the China-U.S. trade and economic relationship and an issue closely tied to many others?

To start with, Chinese and U.S. interests in bilateral trade are roughly balanced. China-U.S. trade and economic relations include services and investment as well as goods. From 2004 to 2008, the U.S. surplus in services with China grew by a phenomenal 35.4% annually, dwarfing the growth in China’s surplus in goods with the U.S.

In 2008, the total sales of American goods in the Chinese market, including goods exported from the U.S. to China, amounted to $224.7 billion, close to the value of goods China exported to the U.S. in 2008, which stood at $252.3. The two countries were almost balanced in terms of sales after adjustment for value-adding freight and insurance fees.

Next, the renminbi exchange rate is not the key to addressing China-U.S. trade imbalance. From 2005 to 2008, the renminbi appreciated by 21% against the dollar but China’s trade surplus with the U.S. increased by 20.8% annually. Since 2009 the renminbi exchange rate has remained basically stable, but China’s surplus with the U.S. has fallen by 16.1%.

Globally speaking, this is not an exceptional case. In 2009 the dollar depreciated against the euro, the Japanese yen and the South Korea won, which did not bring about fundamental changes in the trade between the U.S. and these countries. As a matter of fact, only a basically stable renminbi and dollar are conducive to the overall interest of the international community.

Finally, China always upholds and seeks balanced trade. The U.S. should vigorously expand exports to China. Only balanced China-U.S. trade could bring about sustained development, mutual benefits, and a win-win relationship. The achievement of this goal rests not with restricting China’s exports to the U.S. but with increasing U.S. exports to China. We hope that the U.S., while implementing its strategy to boost exports, can scrap the Cold War mentality, relax its export control against China, and expand the export of competitive products to China.

Where should China-U.S. trade and economic relations go from here?

First, we should refrain from politicizing economic and trade issues. We should vigorously oppose trade protectionism, and give full play to the platforms of the China-U.S. Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade. We hope that the U.S. can recognize China’s market-economy status as soon as possible and include export-controls revision in the priority action plan of the U.S. National Export Initiative.

Second, we should expand the convergence of our interests in economic and trade cooperation. The two economies are highly complementary with huge potentials. At present, both are restructuring their industries and therefore their growth potential. We should give full play to our respective advantages in capital, technology and markets, and actively explore cooperation in trade in services, low-carbon economy and high-tech products.

Third, we should enhance trade and investment facilitation. The Chinese government will adhere to the opening-up policy as one of its basic state policies, and continuously improve policy transparency and trade and investment facilitation.

The government protects the legitimate rights and interests of foreign investors in accordance with laws. We hope that the U.S. will ease irrational restrictions on Chinese companies’ investment in the U.S., and facilitate the movement of businesspeople between the two countries.

Fourth, we should promote the multilateral trading system. China and the U.S. should jointly push for a substantive progress in the Doha Round talks, and lock in the agreed outcomes from previous negotiations.

As Wen Jiabao, the Chinese premier, recently reiterated, it is always better to have a dialogue than a confrontation, cooperation than containment, and a partnership than a rivalry. As long as we approach the China-U.S. commercial relationship in a responsible manner we will definitely be able to make it more stable and sound.

Mr. Zhong is vice minister of commerce of the People’s Republic of China.

George Magnus, “Renminbi reform is just the start for China”

Renminbi reform is just the start for China

By George Magnus

Published: March 22 2010 20:18 | Last updated: March 22 2010 20:18

The friction between Washington and Beijing over exchange rates is about to get a lot worse. On April 15, the US Treasury will issue the first of two semi-annual currency reports, mandated by law since 1988, in which China may be deemed to be manipulating its currency “for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade”. The Treasury and the Congress have been deliberating inconclusively on China’s exchange rate policy since 2003, when the country’s balance of payments surplus was a tenth of what it is now and its foreign exchange reserves were a sixth of the current stock of $2,500bn (€1,840bn, £1,660bn). This time, events may play out quite differently.

If China continues to stand firm in the face of US pressure for policy change, the case will almost certainly go to the World Trade Organisation. More to the point, it will become the most prominent of several bilateral spats, in which the US could threaten to impose across-the-board tariffs on Chinese imports and China could threaten to dump holdings of US Treasury bonds. A major economic dispute between the US and China would be in no one’s interest, least of all China’s, but it looks unavoidable for three reasons.

First, the financial crisis has shocked the US and Europe into a major change in behaviour and exposed China’s economic model as being in conflict with the global system. America, the world’s biggest debtor, is going to save more and borrow less. The change has started in the private sector, and the public sector will follow. But this will only work if China, as the world’s major creditor, saves less . If we all end up trying to be savers, the global economy will tilt more heavily towards protectionism and recession. The US will not watch as this happens and is right to demand stronger action from China.

Second, the heart of the issue is not China’s exchange rate, per se, but the inflexibility of the exchange rate regime. Indeed, the State Council may yet give its blessing to an adjustment in due course, despite the recent protestations by Wen Jiabao, China’s premier, that the renminbi is not undervalued. But an undervalued exchange rate is at the centre of a development model built around exports and capital investment. The currency regime is a tax on consumption, which accounts for a mere 36 per cent of gross domestic product and represents a considerable subsidy to exports. The excess savings that sustain this model will not decline without extensive political reform that includes but goes beyond the exchange rate system.

Excess savings are locked, for example, in an economy that has left a rural population of 800m behind in terms of incomes and economic security; in the hukou system of urban citizen registration, which forces millions of migrant workers to save; in the inadequacy of the social security system; in the large profits of state-owned enterprises that cannot be distributed in the form of dividends; and in the social consequences of the one-child policy. Changing the exchange rate will not have any effect on these structural phenomena.

Third, the status quo in China is leading the country down a potentially dangerous credit and monetary policy path. True, some recent warnings about a China bubble seem overdone, neglecting to note that China is a lot bigger and more populous than the coastal provinces where most of the “evidence” on overbuilding is collated. Centrally controlled China still has the capacity to lean on credit creation and to address the growing non-performing loan problem in the banking system. Nevertheless, China’s monetary policy is complicated by the exchange rate regime, which is under-pricing capital and moving the country inexorably towards negative real interest rates. Commitment to the current development model weds China to a credit system that is incompatible with stable goods and asset prices, not unlike the US in the 1920s and Japan in the 1980s.

With 1.3bn people, China is going to be a large power with a big GDP. But unless it somehow finds in its institutions the capacity to change pre-emptively in the ways suggested, the march to greatness is by no mean assured, and, in any event, very long.

The writer is senior economic adviser at UBS. He is the author of the ‘Age of Aging and Uprising: Will Emerging Markets Shape or Shake the World?’, to be published later this year

Alan Beattie, “White House shows more appetite for action”

White House shows more appetite for action, Financial Times
By Alan Beattie, World Trade Editor

Published: March 24 2010 02:00 | Last updated: March 24 2010 02:00

It all feels rather familiar. Several years of fixing the renminbi to the dollar has brought Beijing under sustained fire from Washington for undervaluing its currency. Senators and congressmen are threatening to hit China with punitive tariffs. It’s 2005 all over again.

Back then the threats came to nothing, not least because China allowed the renminbi to crawl higher. But this time they look more serious. In particular, the precision with which retaliation against China is being prepared suggests more willingness to unsheathe the sabre rather than just rattle it.

So what has changed? One obvious answer is the occupancy of the White House and Capitol Hill. In 2005, the administration of George W. Bush set its face against actions such as currency tariffs, and Republican control of Congress made it less likely. Barack Obama, president, in contrast, has signalled more scepticism towards trade and more urgency to act to reduce subsidised imports, agreeing last year to emergency tariffs on Chinese tyres using a measure repeatedly rejected by Mr Bush.

But Philip Levy, fellow at the conservative American Enterprise Institute, says that the biggest change has been the economic situation following the financial crisis. “Previously, people pointed out that the benefit of the deficit was that the US could borrow cheaply from China,” he says. “Now that the US is in a liquidity trap [where interest rates have lost their power to prompt spending], cheap borrowing is no favour to it at all.”

Yet the US continues to face the same problem in trying to force China to allow the renminbi to rise: devising a measure compatible with international trade rules. Charles Schumer and Lindsey Graham, respectively a Democratic senator from New York and a Republican senator from South Carolina, have revived and refined their bill of several years ago.

The earlier version would simply have slapped 27.5 per cent tariffs on Chinese imports, a gross violation of World Trade Organisation rules. The new bill is more subtle, as it would permit exchange rate misalignment to be used in calculating the size of emergency “countervailing duties” imposed on imports deemed to be subsidised. Other potential measures include opposing more votes for such countries at the International Monetary Fund and forbidding federal government procurement from their companies.

Significantly, the bill lowers the bar for such measures. While the much awaited currency report from the US Treasury, to be released by April 15, decides whether exchange rates have been “manipulated” for trade purposes, the Schumer-Graham bill merely looks for “misaligned” currencies.

Great doubts remain about the legality of such measures. David Spooner, a former senior commerce department official during George W. Bush’s presidency, notes that taking account of undervalued but not overvalued currencies could unfairly inflate the size of emergency tariffs. And it remains far from clear that exchange rate misalignment is an “export-contingent” subsidy as defined by WTO rules.

Some also question the political wisdom of the US going it alone in confronting China over its currency. Dan Price, the senior official on international economics in the Bush White House, says other trading partners may see exports displaced by Chinese production.

“The US should avoid actions that would reframe this legitimate multilateral concern . . . into a bilateral US-China issue with escalating recriminations on both sides,” he says.

One of the lawmakers at the heart of the debate has similar concerns. Sander Levin, the Michigan congressman who is acting chairman of the House ways and means committee, with jurisdiction over trade, has long been a critic of China and its currency policy. But he warns against precipitate action.

Mr Levin said ways and means committee hearings today should produce “a greater sense of knowledge and a greater sense of urgency” ahead of the Treasury’s currency report.

But it remains far from clear they will produce the kind of unilateral action that will escalate this conflict out of heated rhetoric and into potentially explosive legislation.

Doug Palmer,”China official rejects U.S. complaints on currency”

China official rejects U.S. complaints on currency, Washington Post

By Doug Palmer
Reuters
Wednesday, March 24, 2010; 3:52 PM

WASHINGTON (Reuters) – A Chinese official said on Wednesday China would reform its currency policy gradually and keep the exchange rate stable, rejecting mounting U.S. calls for it to rise more quickly.

Chinese Vice Commerce Minister Zhong Shan, in Washington at a time of heightened U.S.-China trade and political tensions, told business leaders that changing the exchange rate was not the way to fix a huge bilateral trade imbalance.

“Revaluing the renminbi is not a good recipe for solving problems,” he told the U.S. Chamber of Commerce, according to a transcript obtained by Reuters.

A growing number of U.S. economists estimate China’s currency is undervalued by up to 40 percent. They say that gives China an unfair price advantage in international trade, takes jobs away from other countries and adds to global financial distortions.

With the U.S. economy having shed 8.4 million jobs since December 2007, U.S. lawmakers have focused on China’s currency as a key factor. Senators are crafting legislation that would slap import duties on Chinese goods to offset the advantage China enjoys from suppressing the value of its currency.

Sponsors of the bill, Democratic Senator Charles Schumer and Republican Senator Lindsey Graham, also want President Barack Obama’s administration to formally label China a currency manipulator in a semi-annual Treasury Department report due on April 15.

“VIGOROUS DISCUSSIONS” WITH TREASURY

The Obama administration twice rejected that route in 2009, as did the administration of Obama’s Republican predecessor, George W. Bush. Wary of straining U.S.-China relations, Obama has instead pressed Beijing to move to a “more market-oriented exchange rate.”

U.S. House Ways and Means Committee Chairman Sander Levin, an influential Democratic Party lawmaker, said: “What seems undisputed … is that China has a persistent economic strategy, a policy, key to which is the pegging of its currency to the dollar at an undervalued rate.

“There’s no easy answer to the problem. But the answer is not to deny the problem,” he said. “China’s currency policy and export-led growth policy are bad for the rest of the world as well” as the United States, Levin told a congressional panel.

Levin said he intended to hold “some vigorous discussions this week” with Treasury officials on the currency issue.

Branding China a currency manipulator would require U.S. Treasury Secretary Timothy Geithner to hold negotiations with China, bilaterally or at the International Monetary Fund. The IMF called the yuan “substantially undervalued” in a March 1 report.

Most U.S. economists agree that the yuan is undervalued. But not all think a revaluation would bring back U.S. jobs, because many of the labor-intensive products Americans buy from China have not been made in the United States for decades.

Critics of the currency hawks also warn against moves that would trigger a trade war with China, which holds $889 billion of U.S. bonds and whose diplomatic help is needed to tame the nuclear ambitions of Iran.

Joseph Brusuelas, chief economist at Brusuelas Analytics, sees “little question regarding whether Beijing targets the level of its currency,” but argues against naming China a manipulator.

“Such a finding will exacerbate economic tensions between the U.S.-China and could push the Obama administration to adopt a counterproductive set of policies that would endanger the nascent global economic recovery,” he wrote in a research report.

“INDIGENOUS INNOVATION” CONCERNS

Zhong highlighted global stability in rejecting pressure on the currency in his talk with business leaders.

“A dip in the value of dollar will undoubtedly bring great repercussions to the global financial system and the world economy,” he told the U.S. Chamber of Commerce.

“The right way to reach trade balance between China and the U.S. should be expanding exports from the U.S. to China, rather than limiting China’s exports to the U.S.,” Zhong added.

U.S. exports to China hit about $70 billion in 2009 — representing flat growth over 2008. In a global economic slowdown, China was the third-biggest market for U.S. exporters and it remains the fastest-growing one.

But U.S. business leaders increasingly complain they are hitting a protectionist wall in China as a result of government policies favoring domestic industries and that Beijing is increasing state involvement in the economy.

“Regrettably, China is moving in a direction that is inconsistent with international best practice in developing an innovative economy,” said Myron Brilliant, senior vice president of the U.S. Chamber of Commerce.

China’s policies are undermining business leaders who have long defended Beijing from U.S. protectionist pressures.

“The ongoing policy approaches by China are eroding the support of their long-standing advocates in the United States, diminishing the many good arguments we have used historically in support of this relationship,” Brilliant said.

China and the United States have been at odds throughout 2010 — over issues such as Google’s decision to defy Chinese Internet censorship, U.S. weapons sales to Taiwan, Tibet and sanctions against Iran’s nuclear program.

Zhong was also slated to visit the U.S. Treasury Department, Commerce Department and the Trade Representative’s office.

A Commerce Department official said U.S. officials who hosted Zhong discussed trade remedy issues, anti-dumping and countervailing duties.

“We also took the opportunity to raise our broader trade-related concerns, such as indigenous innovation,” she said, referring to Beijing’s buy-Chinese directives that U.S. businesses in China cite as a major and growing trade barrier.

(Writing by Paul Eckert; Editing by Andrew Hay and Dan Grebler)

Mark Drajem, “U.S. Lawmakers Press China on Yuan as Zhong Defends Stability”

U.S. Lawmakers Press China on Yuan as Zhong Defends Stability, BusinessWeek/Bloomberg

By Mark Drajem

March 24 (Bloomberg) — The rift over China’s currency policies widened today as U.S. Representative Sander Levin assailed the undervaluation of the yuan, while Chinese Vice Minister of Commerce Zhong Shan defended his nation’s stance as reasonable.

“China’s currency policy and export policy are bad for the rest of the world,” Levin, a Michigan Democrat and acting House Ways and Means Committee chairman, said at a hearing on Capitol Hill in Washington. “The status quo is not sustainable.”

About two miles away near the White House, Zhong was lobbying business leaders at the U.S. Chamber of Commerce to recognize the benefit to the global economy of the “reasonable stability” of Chinese policies that have kept the yuan at about 6.83 per dollar for the past 20 months. Appreciation of the renminbi, or yuan, isn’t “a good recipe” for solving U.S.- China trade imbalances, Zhong said.

“It’s in nobody’s interest, China’s, the U.S., or other countries, to see big ups in the renminbi or big downs in the dollar,” Zhong said in his written remarks to the Chamber, the largest lobbying group for U.S. businesses.

Chinese Premier Wen Jiabao has appealed to foreign companies to help avoid a trade and currency war as the public rhetoric among U.S. lawmakers over the yuan’s restrained value heats up amid job losses and a recession. Zhong is scheduled to meet with U.S. officials and lawmakers during his visit this week, which is aimed at heading off growing complaints.

International ‘Wimps’

Getting the Chinese to allow an increase in the value of the yuan would be the best job-creation policy for the U.S., C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington, told Levin’s committee.

Levin and other lawmakers didn’t propose legislation aimed at raising tariffs on imports from China or forcing the Treasury Department to label China a currency manipulator. Instead, Bergsten and Harvard University historian Niall Ferguson called for the Treasury to label China and other Asian nations as a currency manipulator in a report due next month.

“If we don’t label China a currency manipulator, we will look like the wimps of the Western world,” Ferguson said.

Representative Charles Rangel, a New York Democrat, was among lawmakers who said they doubt that would happen.

“It’s almost like we are playing good cop, bad cop,” Rangel said. “We can almost write the press release” in advance for when the Treasury will pledge once again to work with China to address the issue, he said.

Forcing the Issue

China would balk at allowing the yuan to appreciate if the U.S. labels the country a currency manipulator, said Philip Levy, a fellow at the American Enterprise Institute in Washington and former trade official in the Bush administration.

“The last thing we want to do is force the issue,” Levy said in an interview. “It would make it hard for advocates of change in China.”

Representative Dave Camp of Michigan, the ranking Republican on the Ways and Means Committee, urged a bit more caution in Congress, saying that focusing on the yuan would lead to frustration. He said the U.S. should avoid taking steps such as raising tariffs to push China because that could run counter World Trade Organization rules.

“Let’s not pretend that China’s intervention in the currency markets, by itself, is the root cause of our 10 percent unemployment or of China’s 10 percent annual GDP growth,” Camp said at the hearing.

Appeal to CEOs

Senator Charles Schumer, a New York Democrat, said yesterday he will seek to pass legislation before the end of May that would push China to raise the value of its currency.

Premier Wen met with CEOs including Ford Motor Co.’s Alan Mulally and Rio Tinto Plc’s Thomas Albanese in Beijing on March 22 to discuss the developing trade and currency row.

“I would like to make another appeal to all responsible countries and all the world’s entrepreneurs with a conscience,” Wen told the CEOs. “They must not fight a trade war or a currency war because this will not help us in meeting the current difficulties.”

Last week, 130 U.S. lawmakers sent a letter to Treasury Secretary Timothy Geithner urging him to take tougher measures, including higher import tariffs, to force China to revalue the yuan. Their action followed Wen’s comments on March 14 that the yuan was not undervalued and said pressure for currency gains can amount to trade “protectionism.”

Chinese Companies

Some Chinese executives are siding with the Obama administration instead of Wen.

Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

Wen said a planned meeting of Chinese and U.S. officials in May would help “address disputes and problems.” Relations between the two countries have been strained by the currency dispute, U.S. plans to sell weapons to Taiwan and Obama’s meeting last month with the Dalai Lama.

Yuan forwards strengthened for a second day against the dollar as mounting global pressure prompted traders to increase bets China will permit appreciation. Twelve-month non- deliverable forwards climbed 0.1 percent to 6.6745 per dollar as of 5:33 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.3 percent from the spot rate of 6.8267, according to data compiled by Bloomberg.

Corey Boles, “U.S. Urged to Avoid Rash Steps on Yuan”

U.S. Urged to Avoid Rash Steps on Yuan, Wall Street Journal
March 24, 2010
Corey Boles

WASHINGTON—A panel of currency experts urged Congress not to engage in drastic unilateral trade action in a bid to address the widely held perception that China is keeping its currency artificially low to boost exports.

Testifying Wednesday before the House Ways and Means Committee, the group of economists and historians agreed that the yuan is being held at a falsely low level when compared to the dollar, and that the Treasury should designate China as a currency manipulator.

The Treasury is due to issue a biannual report laying out its currency concerns on April 15, in which it could label China as a currency manipulator.

The experts argued against knee-jerk reaction by Congress in the form of applying tariffs against imports from China or other aggressive reaction to the situation.

They said the better approach would be for the U.S. to work through international bodies like the World Trade Organization and the International Monetary Fund to pressure China to allow the yuan to rise.

C. Fred Bergsten, director of the Peterson Institute for International Economics, told lawmakers that a correction in the value of the yuan “would be the most cost-effective step that can be taken to reduce the unemployment rate in the U.S.”

Mr. Bergsten said the yuan is undervalued against the U.S. by 40% and 25% against on a trade-weighted basis. If that disparity didn’t exist, he said, there would be a $100 billion to $150 billion reduction in the U.S. current account deficit, leading to the creation of an additional 600,000 to 1.2 million U.S. jobs.

Niall Ferguson, an author and history professor at Harvard University, said though that any drastic moves by the U.S. could end up harming an economic recovery in the country.

For their parts, the lawmakers seemed to be more in listening mode than in declaring what action they intended to take.

Rep. Sander Levin (D., Mich.), the chairman of the committee, laid out the case for and against action by the U.S. Last week, at a press briefing, Mr. Levin voiced skepticism that it would be possible to solve the problem unilaterally.

His Republican counterpart on the panel, Rep. David Camp (R., Mich.) said that while the country must focus on the currency issue, it should not do so at the exclusion of other matters like intellectual property theft by China.

This, he said would “more likely to lead to collective frustration than to any improvement in the health of the critical U.S.-Chinese economic relationship.”

Senate lawmakers have opted for a much confrontational approach, introducing legislation last month that would force the Obama administration to take action including applying tariffs against Chinese imports.

To date, the administration has said that it believes China should allow the yuan to rise in value, but has shied away from taking any action to apply pressure to the country.

Rep. Charles Rangel (D., N.Y.), who recently stepped down from the helm of the Ways and Means Committee due to an ongoing ethics investigation, challenged the administration to show more leadership on the issue.

“Does anyone in this room actually think the Treasury Secretary will designate China as a currency manipulator,” Mr. Rangel said.

Write to Corey Boles at corey.boles@dowjones.com