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Archive for Monday, May 9, 2005

U.S. toughens stance on Chinese currency

May 9, 2005

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— Two years of quiet diplomacy by the Bush administration did not persuade China to change its currency system. So the United States now is turning up the volume, even enlisting the help of financial heavyweights such as Federal Reserve Chairman Alan Greenspan.

Critics contend it will take more than just talk to force China to scrap a system they blame for America's soaring trade deficit and the loss of nearly 3 million U.S. manufacturing jobs over the past five years.

Since 1994, the Chinese have pegged their currency, the yuan, to the U.S. dollar in a narrow range in which 8.28 yuan will buy $1.

American manufacturers say this system has undervalued the yuan by as much as 40 percent. The weaker yuan makes Chinese goods cheaper in the United States and American products pricier in China.

The administration has hoped its diplomatic efforts since 2003 would convince Beijing that it should allow market forces to set the yuan's value. U.S. officials also have said they understood China needed time to prepare for such a switch.

But the administration suddenly toughened its rhetoric last month. Treasury Secretary John Snow let it be known the United States now feels that China has made all the preparations necessary and could switch immediately to a flexible exchange rate.

In support, Greenspan told a congressional committee that China's current system represented an increasing threat, including higher inflation, to the Chinese economy. Also making that point are economists at the International Monetary Fund and the World Bank.

Explaining the shift in tactics, critics of the go-slow approach cite the political fallout from the U.S. trade deficit. It hit a record $617 billion last year, including a $162 billion deficit just with China, the highest ever with a single country.

Trade experts believe that imbalance with China could top $240 billion this year because American manufacturers of textiles and other products are facing a flood of Chinese imports.

The Senate last month voted by a surprisingly wide margin, 67-33, to allow a vote on a bill that would impose 27.5 percent across-the-board tariffs on Chinese imports to the United States unless China changes its currency system.

One of the measure's sponsors, Sen. Charles Schumer, D-N.Y., said the vote showed "stunningly how strong the sentiment" in the Senate is for such a change in Beijing.

After that vote, the free-trade administration stepped up its own campaign, concerned that protectionist legislation could pass. The administration's effort has sent rumors throughout global currency markets that China could be on the brink of letting its currency rise in value.

Speculation only grew last week when the Treasury said a delegation of officials from China's central bank would meet today in Washington with a Treasury team to discuss technical issues involved in moving to a floating currency.

U.S. manufacturers are worried that China will continue to stonewall as America's trade deficit soars and more U.S. manufacturing jobs are lost.

For that reason, they are lobbying the administration to single out China as a country that is intentionally manipulating its currency to gain unfair trade advantages. The administration is required by law to report to Congress on this matter twice a year. It has yet to brand China as a currency manipulator.

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