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US bill aims to shake China off the
peg
HONG KONG - If China
does not ease controls on its currency within six
months, it will face a 27.5% tariff on all exports
to the US under legislation to be introduced in
the Senate on Friday. According to Wes Hickman, a
spokesman for Senator Lindsey Graham, a South
Caroline Republican who is sponsoring the bill,
along with Senator Charles Schumer, a New York
Democrat, the bill, if approved, will require
China to "abide by international trade agreements
and stop manipulating the value of the yuan".
Reacting to the news, Chinese Foreign
Ministry spokesman Kong Quan said legislation "is
not the right way ... We believe the currency
issue in the final analysis should be conducive to
the economic development of a country. China's
stable, sustained and rapid development is not
only conducive to China itself but is also
mutually beneficial to trade cooperation between
China and Asia and all countries in the world."
Amid charges that the (undervalued) yuan
is causing havoc on the US economy, at least a
dozen senators from both the Republican Party and
the Democratic Party have agreed to co-sponsor the
bill, a reflection of the frustration in Congress
over China's refusal to move to a market-based
exchange rate, despite pressures by the Bush
administration. Schumer and Graham offered a
similar measure last year as well, but withdrew it
in favor of diplomatic negotiations.
The
senators were to testify on Thursday before the
US-China Economic and Security Review Commission,
which is currently holding hearings on Chinese
trade. The commission, a Congress-sanctioned panel
pushing for a tough US approach on China, is
examining China's record of compliance of its
World Trade Organization (WTO) commitments and
weigh options of using US trade laws and WTO
mechanisms for addressing trade problems.
The Chinese peg, which keeps the yuan
undervalued against the dollar by 15-40%,
depending on who makes the estimates, is one of
the main reasons behind the record US trade
deficit with China, the commission noted last
year.
The yuan, pegged at 8.27 to the US
dollar, is kept in a narrow band by the People's
Bank of China. The Bush administration believes
the range is too weak, made worse by the recent
weakening of the dollar. In a report earlier this
month, the commission estimated that the
"artificially low value of the yuan" subsidizes
Chinese exports and is a virtual tariff on foreign
imports, helping China to enjoy significant trade
surpluses. The US trade deficit with China widened
to over $396 billion between 1998 and 2002. The
deficit is already one-fourth the total US deficit
with all countries.
As a result, the US
claims that it lost 1.5 million jobs to China
between 1998 and 2002. In particular, the US
manufacturing sector has lost over 2,600,000 jobs
since March 2001, which accounts for approximately
90% of the total US job losses. The Chinese
government, according to the findings of the
commission, has intervened in the foreign exchange
markets to hold the value of the yuan within an
artificial trading range, violating the spirit and
letter of the world trading system.
The
Chinese central bank refused to comment on the
bill. A leading Chinese government economist told
Bloomberg that China wouldn't be swayed into
changing its currency policy. "This kind of bill
comes up every year and will keep being raised in
the future," said Zhu Baoliang, chief economist at
the State Information Center, a research group
under China's top economic planning agency. "I
don't think Chinese government officials will
change their stance."
Last year, Graham
and Schumer decided to give the US administration
more time to persuade China to free the peg and
did not push to have the bill to the Senate floor
for a vote, spokesman for Graham, Kevin Bishop,
was quoted as saying. "The Chinese are not taking
the administration seriously, so we have to show
[them] we are serious about it [this time]," he
said.
Apart from this bipartisan bill,
some lobby groups in the US are planning a series
of actions to make the Chinese toe the US line.
The National Association of Manufacturers, a
powerful lobby of American factory owners, plans
to urge the International Monetary Fund and the US
Treasury Department to get China change its
currency regime. The group wants the International
Monetary Fund to crack the whip on China as a
cheap yuan gives Chinese exporters an advantage.
It also wants the Treasury to declare that China
is manipulating its currency.
The Chinese
establishment has consistently made it clear that
it does plan to change the currency peg at some
time, but is in no hurry to do so and will
definitely not be seen doing it under pressure.
"We do not have a specific timetable for changing
the exchange rate regime. We have to take into
account several elements," Chinese Vice Premier
Huang Ju recently told the World Economic Forum in
Davos. "We need to have a stable macroeconomic
environment, well-established market mechanisms
and a healthy operational system. This is the
first prerequisite." When pressed on the yuan
issue, central bank deputy governor Li Ruogu said,
"Leave this issue to the Chinese people and the
Chinese government. We will certainly figure out
what is the most suitable approach for China's
economic development."
One of China's
prime arguments against a yuan relaxation is
speculation. In the last two months of 2004,
China's forex reserves jumped to $67.5 billion,
widely seen as evidence that large amounts of
speculative capital have been pouring into China
in anticipation of a rise in the yuan. China also
wants to clean up its banking sector first to
insulate it from any shock arising from a yuan
regime change. China's banks are burdened with
over $500 billion of bad loans.
China's
stand has to some extent been vindicated by none
other than the chairman of the US Federal Reserve,
Alan Greenspan. Taking a different line from the
growing chorus for yuan's free float, the high
priest of American finance has warned in the past
that any hasty decision to float the yuan could
weaken the Chinese banking system and threaten the
world economy. In a letter to the Senate, he made
it clear that a free float could cause a heavy
flow of capital out of China, which would in turn
undermine Chinese banks and destabilize the world
economy. "Many in China fear that removal of
capital controls that restrict the ability of
domestic investors to invest abroad and to sell or
to purchase foreign currency, which is a necessary
step to allow a currency to float freely, could
cause an outflow of deposits from Chinese banks,
destabilizing the system," he said in the letter.
But pressure has been mounting on China
from the highest quarter in the US administration.
On Wednesday, President George W Bush said at a
press conference that if China allowed its
currency to trade on open markets, it would help
reduce the US trade deficit. "In terms of the
trade deficit, it is important for us to make sure
that countries treat their currencies in market
fashion ... I've been working with China, in
specific, on that issue," Bush said.
China
has, however, kept its window of dialogue open. It
is sending its central bank governor and finance
minister to the Group of 7 meeting in London this
weekend, where the leaders of the industrialized
nations are expected to make a fresh appeal to
China to relax the yuan. But analysts say there is
very little chance of Beijing bending. And
arm-twisting tactics like the proposed US bill
will only steel China's resolve against giving in.
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