Kathy Chen, “U.S. Lawmakers Gear Up to Seek New Yuan Policy”

U.S. Lawmakers Gear Up to Seek New Yuan Policy, Wall Street Journal
Kathy Chen
August 11, 2010

WASHINGTON—The U.S. trade deficit with China in June hit its highest level in nearly two years and could spur congressional pressure on Beijing to revamp its currency policy.

America’s trade deficit with China jumped 17% in June over the previous month to $26.2 billion, the biggest gap since October 2008. Earlier this week, China said its overall trade surplus hit $28.7 billion in July, an 18-month high.

The Commerce Department figures could set the stage for a fight in Congress this fall over China’s currency policy. Some lawmakers, arguing that China has set the yuan artificially low to make its exports more price competitive on global markets, are keen to pass laws that would penalize countries that are found to be manipulating their currencies.

China, under pressure from the U.S. and other countries, announced a shift to a more-flexible exchange rate in June. But the yuan has appreciated less than 1% since then, and some economists say that it remains undervalued against the dollar by at least 25%.

While efforts to pass such legislation have made little headway, lawmakers and industry groups agree that the issue could gain traction in September, given that voters, who head to the polls in November, are angry about the country’s continued weak economy and high unemployment rate.

A number of bills have garnered bipartisan support, including measures promoted by Tim Ryan (D., Ohio) and Patrick Murphy (D., Pa.) in the House, and by Charles Schumer (D., N.Y.) in the Senate.

These efforts would, among other things, make it easier for companies to seek import duties on goods from countries designated as having undervalued currencies. The Ryan-Murphy bill has more than 127 co-sponsors, including 37 Republicans.

Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi (D., Calif.), said the House Ways and Means Committee would hold a hearing on the currency issue in September after Congress returns from summer recess.

“But no final decisions have been made on moving legislation forward,” he said.

Sen. Sherrod Brown (D., Ohio), a co-sponsor of the Schumer bill and a member of President Barack Obama’s Export Council, wrote Mr. Obama on Aug. 4, urging the administration to take tougher measures to address “unfairly subsidized exports” by countries such as China. Ten other senators signed the letter, including Republicans Jim Bunning of Kentucky and Olympia Snowe of Maine.

The Treasury Department on Wednesday declined to comment on the U.S.-China trade gap or China’s currency policy.

Business groups are expected to intensify their lobbying on the issue, although they differ over whether punitive legislation aimed at China’s currency policy is the best solution for narrowing the U.S.-China trade gap.

Augustine Tantillo, executive director of the American Manufacturing Trade Action Coalition, a Washington trade group representing U.S. manufacturers, says the group backs the Ryan-Murphy bill and is lobbying lawmakers, targeting those from Midwestern and Southeastern states with large manufacturing sectors and high unemployment.

“These trade surpluses aren’t a result of happenstance,” he said. “We’re hoping concerns about job creation and the fall election environment will finally give us an opportunity to bring the legislation to a vote.”

Erin Ennis, vice president for the U.S.-China Business Council, which represents U.S. companies doing business in China, said the window for China to “show it was serious” about addressing U.S. concerns about the yuan would close in September, when Congress returns to session.

But while Ms. Ennis expected the Chinese currency policy to be a major issue in the fall, “this isn’t our member companies’ top priority,” she said.

Rather, she said that Congress and the administration should focus on reducing barriers to China’s market and on the country’s new “indigenous innovation” policy, which many Western companies say unfairly favors Chinese companies by promoting domestic innovation.

“Early View on China’s Currency Overhaul: Little Change,” Wall Street Journal

Early View on China’s Currency Overhaul: Little Change, Wall Street Journal
July 16, 2010
Aaron Back, Andrew Batson, and Bob Davis

A month after China announced it would ease its currency’s de facto peg to the dollar, the yuan has gained just 0.7% against the dollar, and the stated policy shift has done little to defuse political anger at China in the U.S.

Four weeks isn’t enough time to judge the full impact of China’s intent, but, so far, this doesn’t have the hallmarks of a major shift to a more-flexible currency. More than half the appreciation of the yuan thus far came on the first trading day after the announcement. In the past two weeks, movement has largely halted.

But Americans aren’t waiting. The currency move thus far is “woeful,” said AFL-CIO President Richard Trumka, who says the yuan is undervalued by 40%. “Even if it increased 0.7% a month for a year, it would be woeful,” he said.

Frank Vargo, a National Association of Manufacturers’ vice president, said, that without a greater appreciation, “there will be a fair amount of pressure to do something” on Capitol Hill to penalize China.

But any substantive move against China in Congress is unlikely until after the November elections because lawmakers are focusing on other priorities, including deficits, taxes and unemployment, said Mr. Trumka.

Sen. Charles Schumer, a New York Democrat, whose legislation would make it easier to take punitive action against Beijing, said in a statement, “There hasn’t been an opportunity yet in the last month to bring our proposal to the Senate floor…We continue to push our legislation and are looking for the first available opportunity to offer it.”

On Thursday, a deputy governor of the People’s Bank of China reaffirmed the central bank’s commitment to currency flexibility and pointed out its benefits. The comments by Hu Xiaolian are the first lengthy elaboration of PBOC views on currency policy since the June 19 announcement. The remarks, published on the PBOC web site in both English and Chinese, are noteworthy because they echo much of the criticism of China’s tightly controlled exchange-rate regime leveled by the U.S. government and International Monetary Fund.

Ms. Hu said a fixed exchange rate would be dangerous to the nation’s economy and that rigid exchange rates had contributed to financial crises in the past, including in Mexico in 1994, Argentina in 2001 and several Asian countries in 1997. “Thus, it is necessary for large countries to have (a) flexible exchange-rate policy,” she said.

The People’s Bank of China has been the leading voice for currency reform within the Chinese government, arguing against the Commerce Ministry and others who said letting the exchange rate rise would hurt Chinese exporters by making their goods more expensive in dollar terms. The central bank’s argument won out with China’s top leaders, who treasure stability but want to strengthen domestic consumption and reduce China’s reliance on exports.

Conditions that preceded both unpeggings in 2005 and 2010 are similar: in China, the economy is surging, and in the U.S., political impatience with Beijing’s currency policy is gaining steam.

When China unpegged the yuan from the dollar in July 2005, the currency gained about 2% during the first month of trading—and nearly all on the first day. In the first year, the yuan rose just 3.5%, and over a three-year period, gained a total of about 21%. Beijing re-established the peg in mid-2008 as the global recession took hold. This time around, at the current rate of appreciation, the yuan would rise more than 8% over a year—though there is no guarantee the Chinese plan a steady increase.

The recent change in policy was announced shortly before leaders of the Group of 20 leading and developing nations met in Toronto, taking China’s exchange rate off the agenda and making it easier for the U.S. Treasury last week to, again, avoid declaring China a currency manipulator in a congressionally mandated report.

Shortly after Beijing announced its move, President Barack Obama suggested that the U.S. would judge China’s progress “over the course of a year,” but later, telling reporters about a conversation he had had with Chinese President Hu Jintao, Mr. Obama truncated the time frame to “the months ahead.”

The small appreciation thus far has the Obama administration and Congress looking for levers to keep the pressure on China. Treasury Secretary Timothy Geithner has said “what matters is how far and how fast the renminbi appreciates.”

The next lever may be IMF review of China’s economy, likely to be completed in September. China had blocked the IMF from undertaking a review —generally done annually—since 2007 as the two sides squabbled over China’s currency policy. IMF officials regularly describe China’s currency as “substantially undervalued.” The U.S. is pressing China to permit the publication of the IMF review., which could focus international attention again on China’s currency policy.

A widening of the U.S. trade deficit with China amid widespread concern about unemployment is likely to prompt congressional rhetoric—if not action—to act against China. In May, the U.S. trade deficit with China expanded to $22.3 billion, the widest since October. “I think the knives will come out fairly soon,” predicted Cornell University economist Eswar Prasad, a China specialist.

China took pains to signal that movement of the currency would be gradual, and that the yuan could fall as well as rise. Such a strategy is aimed at fending off speculative flows of capital betting on currency appreciation, one of the chief drawbacks of a controlled exchange-rate regime. The fact that the yuan isn’t predictably and consistently rising against the dollar thus achieves one of China’s main economic goals, even though it worsens political strains with critics abroad.

Chinese officials point out that the yuan has appreciated substantially against the sagging euro this year, even though it has moved little against dollar.
—Liu Li contributed to this article.

http://online.wsj.com/article/SB10001424052748703722804575368970567812464.html

James Bacchus, “A Trade War With Zero Currency”

A Trade War With Zero Currency, Wall Street Journal
July 12, 2010
James Bacchus

In the past, U.S. congressional threats to slap tariffs on Chinese imports in retaliation for the perceived trade effects of Chinese currency practices were only threats. Now, for the first time, there is a real chance these threats could lead to action.

That’s because the debate in America is changing. Mainstream politicians, the media and even businesspeople are starting to call for action against Beijing. Earlier this month, Andy Grove, former chairman and chief executive of Intel, said the U.S. should “levy an extra tax on the product of offshored labor. If the result is a trade war, treat it like other trade wars—fight to win.” He is far from alone in urging such action.

Thus, there’s growing support in Washington for punitive legislation sponsored by Senator Charles Schumer. The New York Democrat wants to change U.S. law to permit additional tariffs to be applied to Chinese imports to offset the “subsidy” provided by the yuan’s alleged undervaluation. The level of those tariffs could exceed many billions of dollars annually.

Evidently, Senator Schumer has been persuaded that this action would somehow be consistent with U.S. obligations to China under the international rules on which both countries have agreed as members of the World Trade Organization. It is not at all clear that it would be.

Chinese currency practices benefit Chinese producers generally. To fit the definition of a “subsidy” under WTO rules, a governmental action must take the form of a “financial contribution” that, unless conditioned on exports or on the use of domestic over imported goods, must also be “specific” to “certain enterprises.” Successfully defending the notion that Chinese currency practices meet this definition would be difficult, to say the least, in WTO dispute settlement, where there is no precedent for such an assertion or such a ruling.

But given that America is in the middle of a “jobless” recovery, where five unemployed Americans are still seeking work for every one job available, such a move could prove popular. Few members of Congress seeking re-election in November are likely to be dissuaded from voting for such legislation because it may be inconsistent with international law. They would only see the immediate political benefit.

Nor are they likely to be deterred by the possibility of losing a WTO case to China a year or two from now. By that point, they would already be re-elected. Never mind the extensive and expensive trade sanctions that could later be applied lawfully by China if the U.S. lost at the WTO and refused to comply with the verdict.

To his credit, President Barack Obama has refrained from indulging in inflammatory rhetoric or taking precipitous action on the currency issue. Last week, Treasury Secretary Timothy Geithner declined to name China a currency manipulator under U.S. law. Clearly, the Obama administration continues to prefer quiet diplomacy to confrontation as the best course for resolving the currency dispute.

The Chinese government no doubt wants to defuse the situation, too. On the eve of last month’s Group of 20 meeting, Beijing announced it would drop the yuan’s peg to the dollar and let the value of its currency rise. This cooled the heat on China at the summit in Toronto, but it unfortunately didn’t lower the rising political temperature in Washington.

That’s partly because China simultaneously assured its own exporters that the value of the yuan will rise only gradually. Since the announcement, the yuan-dollar exchange rate has hardly budged. Mr. Geithner recently noted he would track “how far and how fast” the value of the yuan rises.

Despite his best intentions, Mr. Obama may not have the votes in Congress to stop the Schumer bill. Many Americans believe the yuan’s weakness makes Chinese exports to the U.S. cheaper and U.S. exports to China more expensive, robbing America of millions of jobs and contributing to America’s large trade deficit with China. It would be hard for the president to veto such a popular piece of legislation in the midst of an election campaign when his party’s continuing control of Congress is in dire jeopardy.

Both sides must act to calm these tensions before the world’s most important trade partners become embroiled in a mutually self-defeating trade conflict. The Schumer bill, if enacted, would thwart ongoing efforts in both countries to sustain the fragile global economic recovery and create more jobs and more prosperity in America and China alike. Whatever the pressures politically, America’s best interest economically is in keeping America open to growing and mutually beneficial two-way trade with China.

For its part, China can stop relying on cheap exports for growth, and start relying on spending by Chinese consumers in its rapidly developing economy. China could also reconsider “indigenous innovation” and other short-sighted, protectionist policies that make U.S. and other trade partners and investors fear that China is retreating from liberalization. Above all, the farther and faster the yuan rises against the dollar, the sooner and more significant the easing of trade tensions.

These actions would do much to help President Obama and others in the U.S. who are trying hard to stop the tariff-rattling and bring the two countries back from the brink of a destructive trade war. It’s in everyone’s interests that they succeed.

Mr. Bacchus is a former chairman of the World Trade Organization’s Appellate Body, congressman and U.S. trade negotiator. He is currently a partner at Greenberg Traurig in Washington.

Alan Beattie and James Politi, “US welcomes loosening of renminbi peg”

US welcomes loosening of renminbi peg, Financial Times

By Alan Beattie and James Politi in Washington

Published: July 9 2010 02:39 | Last updated: July 9 2010 02:39

The US declined to name China as a currency manipulator in a politically sensitive report on Thursday, citing Beijing’s loosening of the renminbi peg in June as “a significant development”.

The report had been delayed from April as part of a process of quiet diplomacy to encourage China to allow some flexibility in the exchange rate.

The renminbi, which was allowed to float upwards by 21 per cent between July 2005 and July 2008, was then repegged in response to the financial crisis. Beijing said on June 19 it would permit some movement but did not commit itself to a target.

Tim Geithner, Treasury secretary, said: “What matters is how far and how fast the renminbi appreciates.”

Mr Geithner, who has been criticised by some lawmakers for failing to push Beijing hard enough, said: “We will closely and regularly monitor the appreciation of the renminbi … in close consultation with Congress.”

Key lawmakers said that China would have to allow faster appreciation of the renminbi then previously. Sander Levin, chairman of the House ways and means committee, said: “This is a first step, but clearly only that.”

Members of Congress have threatened legislation to restrict Chinese imports on the grounds that the currency is undervalued and preventing US companies from competing.

“We must monitor China’s progress but also give serious consideration to all options in the event, as was the case in 2005-08, that China fails to take the additional necessary steps,” Mr Levin said.

Naming a government a manipulator, which involves a complex set of criteria, carries no sanctions except a commitment to start negotiations, which in the case of the US and China have been under way for years.

Meanwhile, the International Monetary Fund said on Thursday the US economy had rebounded faster than expected but faced the threat of contagion from sovereign debt problems in Europe.

In an advance summary of its annual health check of the US economy, the IMF said: “While still modest by historical standards, the recovery has proved stronger than we had earlier expected, owing much to the authorities’ strong and effective macro-economic response.”

The release of the report was accompanied by good news on the economy, which contrasts with a run of recent disappointing data. The number of Americans filing for jobless claims last week fell more than expected, offering some measure of comfort that the recovery in the labour market is advancing, albeit slowly.

But the IMF warned that, along with risks of renewed weakness in the US housing market, international events of recent months had introduced risks to the recovery.

Michael Casey and Min Zeng, “Nations Use Diplomacy to Press Beijing on Revaluing Yuan”

Nations Use Diplomacy to Press Beijing on Revaluing Yuan, Wall Street Journal
Michael Casey and Min Zeng

WASHINGTON—Concerns over China’s exchange-rate policy were absent from public statements that world financial leaders released after weekend meetings here. But officials from several countries used the forum to nudge Beijing toward a revaluation of the yuan, a move that analysts see as increasingly likely before the end of this quarter.

In voicing their concern that an undervalued yuan creates distortions in world trade and financial flows, officials opted for diplomatically polite language. Some China watchers say such subtle expressions of concern are likely to prove more fruitful than tough talk of sanctions against Beijing, such as those pushed by Sen. Charles Schumer (D., N.Y.).

Chinese officials have repeatedly said they won’t bow to foreign pressure to revalue the yuan.

U.S. Treasury Secretary Timothy Geithner may have had this in mind when, speaking after the ministerial meetings Friday, he said currency reform is “China’s choice” and that he believes it “will decide it’s in their interest.” Later, in a presentation to the oversight board of the International Monetary Fund, Mr. Geithner urged large emerging economies to “return to market-oriented exchange rates, where appropriate” without specifically naming China.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, was more blunt. Before the same IMF committee, he said “the Chinese authorities are encouraged to implement soon a more flexible exchange-rate regime,” a move that would “contribute to stability by reducing current-account imbalances.”

Meanwhile, in an interview, Brazilian Central Bank Governor Henrique Meirelles said adjustments to “exchange-rate regimes are part of the overall question” of rebalancing the world economy. It is just one part of the mechanism through which current-account surplus countries like China become more dependent on domestically led growth while consumption-heavy countries like the U.S. can increase their savings, he said.

“It is increasingly obvious that not only the U.S., but also Europe and some emerging-market countries that are members of the G-20 believe that greater flexibility in the renminbi [yuan] is good for both China and the global economy,” said Stephen Jen, managing director of macroeconomics at hedge fund BlueGold Capital in London.

But “the lack of any reference” in a communiqué issued by finance ministers from the Group of 20 major economies “to what is an obvious opinion in the world suggests that the G-20 [countries] are restraining themselves in order to respect Beijing’s wishes,” he said. Mr. Jen added that in any case the Group of 20 makes decisions by consensus, which meant China would have vetoed any such reference in the document.

Jim O’Neill, chief economist at Goldman Sachs in London, said the subtle diplomacy effort suggests U.S. and other G-20 officials “perhaps also know that China has decided to move.”

The prospect of a revaluation has been made more likely by recent comments from Chinese officials suggesting that they “are waiting for the right time” to do so, he said.

Officials at the People’s Bank of China are believed to favor letting the yuan rise against the dollar because it would complement other monetary-tightening measures aimed at calming inflationary pressures and curtailing bubbles in China’s high-end real-estate market.
Printed in The Wall Street Journal, page A12

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.

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

Martin Crutsinger, “Pressure growing on China to revalue currency”

Pressure growing on China to revalue currency
By Martin Crutsinger (AP)
March 24, 2010

WASHINGTON — Pressure on China to allow its currency to rise in value against the dollar intensified Wednesday with a prominent economist telling Congress that the Obama administration should cite China and four other Asian economies as currency manipulators in a report due in April.

C. Fred Bergsten, head of the Peterson Institute for International Economics, told the House Ways and Means Committee that a successful campaign to pressure Asian nations on the currency issue could create as many as 1.2 million new American jobs.

Bergsten said that not only is China keeping its currency undervalued against the dollar, but Hong Kong, Malaysia, Singapore and Taiwan are keeping their currencies undervalued as well to avoid losing sales in markets where they compete against China.

He said he believes the Chinese yuan is undervalued by about 40 percent against the dollar and the other currencies are similarly undervalued. He said allowing those currencies to rise against the dollar to the proper levels would trim America’s trade deficit by $100 billion to $150 billion annually. Last year’s current account deficit totaled $419.9 billion.

Bergsten said a fall in the value of the dollar against the various Asian currencies would boost U.S. exports and result in an additional 600,000 to 1.2 million jobs during a time of high unemployment in this country.

Bergsten said that correcting the Chinese and Asian currency misalignments against the dollar would be the “most cost-effective step that can be taken to reduce the unemployment rate in the United States.”

Bergsten testified at a hearing called by the House panel to highlight the growing unhappiness in Washington over China’s currency policies.

Rep. Sander Levin, D-Mich., and the acting chairman of the Ways and Means Committee, said that the status quo with regard to China’s currency system “was not sustainable.”

Niall Ferguson, a professor of business administration at the Harvard Business School, said that the administration should brand China a currency manipulator. But he said the impact of the U.S.-China trade deficit would not be that significant because China has many other advantages such as low labor costs that contribute to its huge trade surplus with the United States.

“The Chinese authorities are spoiling for a fight,” Ferguson told the committee, saying that meant the United States has to make sure that any tensions over currency do not boil over into a full-blown trade war between the two nations that could destabilize financial markets.

Last month, President Barack Obama vowed to “get much tougher” in trade disputes with China but the administration has given no hint on how it might rule in the upcoming report, which is due on April 15.

Secretary Timothy Geithner on Wednesday repeated his belief that China would soon allow its currency to start rising again against the dollar. China allowed the yuan to appreciate by about 20 percent from mid-2005 to mid-2008 but halted the rise after the global economic crisis began to cut deeply into its exports.

“I think they’ll come to decide it is in their interest that they move,” Geithner said in an interview on “John King USA” on CNN. “I think it is quite likely that they move over time.”

Geithner said he was not worried that the administration’s leverage over China will be constrained by the large federal budget deficits that need to be financed by foreign investors including China, the largest foreign holder of Treasury debt.

“We have enormous stakes in a strong China,” he said. “And they have enormous stakes in having access to our markets, being able to sell goods here.”

The administration has given no hint on how it might rule in the upcoming report, which is due on April 15. Under a 1988 trade law, the Treasury must report to Congress every six months on whether any country has been found manipulating its currency to gain trade advantages.

If China is designated as a currency manipulator, it would trigger negotiations between the two countries and could lead to economic sanctions if the U.S. takes a case before the World Trade Organization and wins a favorable WTO ruling.

China has been cited in five previous reports in the period from May 1992 through July 1994 during the administrations of Presidents George H.W. Bush and Bill Clinton. Those negotiations did not produce any major results and no country has been cited since 1994.

Recently, a group of 14 U.S. senators unveiled legislation that would provide for penalty tariffs to be imposed on Chinese imports if China does not allow its currency to rise in value. Meanwhile, 130 House members sent a letter to the administration urging a tougher approach.

Chen Deming, China’s commerce minister and a key defender of the country’s exchange rate policies, on Wednesday warned that a stronger Chinese currency would have a global impact.

While some analysts believe China is getting ready to allow its currency to rise in part to stem growing inflationary pressures inside the country, various Chinese leaders have taken a tough line on the issue.

Bergsten said he believed the administration would brand China a currency manipulator in the upcoming report, but Rep. Charles Rangel, D-N.Y., said he doubted the United States was ready to make such a move.

Copyright © 2010 The Associated Press. All rights reserved.

Sebastian Mallaby, “Currency spat reveals a nervous Chinese autocracy”

Currency spat reveals a nervous Chinese autocracy

By Sebastian Mallaby
Friday, March 19, 2010; A25

BEIJING

The latest U.S.-China spat is all the more extraordinary because it is unnecessary. For years, Chinese economists have advocated liberalizing the exchange rate and allowing it to rise, weaning the country off its addiction to exports. But when President Obama suggested that last week, China’s leadership reacted with a furious snarl. The central bank’s vice governor accused Obama of “politicizing” the currency issue; never mind that his own boss had hinted at liberalization a week earlier. Then China’s premier, Wen Jiabao, weighed in. Clearly referring to Obama’s unremarkable remarks, Wen growled, “This is a type of trade protectionism.”

What to make of this outburst? It is not right on the merits. If any country is responsible for protectionism and for politicizing the exchange rate, it is China: Beijing’s leaders have made a political decision to peg their currency at an artificially low level, handing their exporters a competitive advantage. Yet China’s outburst reflects the insecurity behind its confident facade. It serves as a reminder of how autocratic political systems suffer from the lobbies and gridlock that bedevil democracies.

The reminder is timely because China’s financial comeback has made autocracy look good lately. The country’s export-driven growth model made it acutely vulnerable to the global slump; at the end of 2008, growth fell to almost zero. Then China roared back, growing at 8.7 percent last year. No rival comes close to matching its dynamism.

But the currency flare-up hints at China’s vulnerabilities. The government engineered its comeback with desperate measures: As well as the announced budget stimulus, it embarked on a largely unannounced monetary stimulus, which consisted of ordering banks to shovel loans out the door as fast as possible. Now, inflation is rising; the banks are wallowing in loans that will never be repaid; and the government is scrambling to close the monetary spigot. As the United States may discover in its turn, withdrawing a stimulus can be difficult.

The first worry for China is that lending won’t come down fast enough. Banks have made commitments to finance projects and cannot easily back out; besides, money may leak into bubbly real estate projects via channels that circumvent the banking system. Moreover, even if lending is reined in, the banks may do so inefficiently: China sets monetary policy by targeting the quantity of loans rather than their price, so powerful state-owned enterprises are liable to get capital while more productive private firms are starved of it. Meanwhile, ambitious provincial politicians such as Bo Xilai, the party boss in the western city of Chongqing, may defy the central government. If he wants bank loans to build popular projects such as affordable housing, it may be hard to stop him.

So while China’s leaders frequently sound smug, they are nervous. In the news conference at which he chastised Obama, China’s premier also referred menacingly to “the unsteady, uncoordinated and unstable development of the Chinese economy.” Amid all the uncertainty about how to let the air out of an asset bubble and bring runaway bank lending under control, the last thing Chinese leaders seem to want is to abandon the yuan’s peg to the dollar, which they regard as a source of stability.

Again, though, this view is wrong on the merits. Chinese growth is unstable partly because of the yuan-dollar peg, which obliges the government to set interest rates with an eye toward the exchange rate rather than using them to manage the cost of capital. But the technocratic arguments are trumped by political pressures. Exporters lobby the government not to let the yuan rise, and the lobbying is effective. Nationalists reflexively oppose policies that Washington demands; no Chinese official wants to look soft on foreign policy. In conversations in Beijing this week, several Chinese analysts suggested that Google’s protests against Chinese hacking were a deliberate provocation orchestrated by the Obama administration. Such is the climate of suspicion toward Washington.

Sooner rather than later, China needs to free its exchange rate and switch from rationing capital to pricing it. Sooner rather than later, China needs to rely less on exports that foreigners cannot afford to buy without borrowing too much and setting the stage for another credit crisis. But while China’s autocratic system was good at quickly delivering a stimulus, it is not so good at tackling trickier structural challenges such as revamping its currency policy.

Good at spending money but not good at complex reform? Does that sound a little like American democracy?

smallaby@cfr.org