The
following is an excerpt of the statement of US
Treasury Secretary John Snow on the Report on
International Economic and Exchange Rate
Policies.
... Let me turn to emerging
Asia, and China specifically. Strong growth in
China and the region have helped propel the global
economy. But greater exchange-rate flexibility in
emerging Asia is an irreplaceable component of the
adjustment of global imbalances, and Chinese
exchange-rate flexibility is the linchpin of
currency flexibility in emerging Asia.
China's international economic and
exchange-rate policies are deeply concerning. The
United States has been joined by the international
community, including the G7 [Group of Seven],
the
International Monetary Fund
(IMF), and Asian Development Bank in vigorously
encouraging China to implement greater
exchange-rate flexibility. In the final analysis,
though, the Treasury Department is unable to
conclude that China's intent has been to manage
its exchange-rate regime for the purposes of
preventing effective balance-of-payments
adjustment or gaining unfair competitive advantage
in international trade. Thus we have not
designated China pursuant to the 1988 Trade Act.
Let me share with you our reasons.
China
is engaged in a historic transformation to a
market system. To achieve the requisite economic
rebalancing, China must make its currency regime
more flexible, strengthen consumption and
modernize its financial system - the three pillars
of our policy engagement.
China's
leadership has publicly committed to take these
steps. President Hu [Jintao], in a meeting with
President [George W] Bush on April 20, stated that
China does not want a large current-account
surplus and will act to reduce it. Premier Wen
[Jiabao] made this same commitment in his speech
to the National People's Congress and also
committed to allow more exchange rate flexibility.
China's recent five-year plan places strong
emphasis on consumption and rural development in
order to spur domestic demand. China's central
bank governor laid out a five-point plan to reduce
the surplus, including efforts to boost domestic
demand, reduce China's high saving rate,
accelerate removal of trade barriers, allow
foreign firms greater access and achieve greater
exchange-rate flexibility.
Of course,
words must be backed by action, and China is
taking some action. On the exchange-rate front,
China abandoned its eight-year peg against the
dollar last July, and the yuan has moved slightly
higher against the dollar since that time. But
given the close relationship between the yuan and
the dollar and because the dollar appreciated last
year across the board, China's currency on a
trade-weighted basis appreciated by over 9% last
year. China has also taken steps to create a
deeper and more liquid foreign-exchange market,
allowing interbank foreign-currency trading for
the first time this year.
China is also
acting to boost consumption, dampen its high
saving rate, and promote domestic demand.
Recently, China has put in place steps to cut
taxes, develop rural areas, and raise minimum
wages.
China's efforts to modernize its
weak financial sector are part of the strategy to
spur consumption and more efficient investment. In
the last year and a half, China has acted to
tighten its risk-classification system for bank
loans, deregulate and raise bank lending rates,
and bring in foreign expertise and know-how to
improve the soundness and market orientation of
the banking system. We strongly urge China to
allow foreign firms greater access to China's
financial system and to lift the ownership caps
facing foreign entities.
Let us be clear:
we are extremely dissatisfied with the slow and
disappointing pace of reform of the Chinese
exchange-rate regime. The RMB's [renminbi, or
yuan] appreciation has done little to curb China's
large current-account surplus or cool its
fast-growing economy, which last quarter was at an
over-10% annual rate. Further exchange-rate
flexibility is a key tool for tightening financial
conditions amid ample liquidity, reinforcing the
effect of recent monetary policy actions aimed at
cooling economic activity. Thus this slow pace is
neither in China's self-interest nor in the
interest of the world economy. With a still-rigid
exchange rate, China lacks effective
monetary-policy tools to avoid the boom-bust
cycles it has experienced in the past. This is
particularly important now that investment in
China appears to be reaccelerating, increasing the
risk of a hard landing.
For the last three
years, the Treasury Department has made engagement
with China one of its top priorities. This
intensive engagement has first and foremost
concentrated on exchange-rate flexibility, but
also on the other steps necessary to shift the
sources of growth toward domestic demand and
consumption, reform the financial sector and to
build the foreign-exchange market infrastructure.
While the economic face of China changes rapidly
each day, we are not satisfied with the progress
made on China's exchange-rate regime and we will
monitor closely China's progress every step of the
way.
It is important for China to
understand that its exchange-rate regime is not
simply a bilateral US-China issue, but a
multilateral issue. Chinese exchange-rate
practices affect the entire world. The IMF is the
world's only multilateral institution with a
mandate to consider exchange rates. Managing
director Rodrigo De Rato has called for
strengthening IMF exchange-rate surveillance in
his medium-term strategy. Further, at the recent
IMF/World Bank spring meetings, he developed a new
mechanism for multilateral consultations to
broaden the global discussion of imbalances. The
IMF must take this mandate for leadership by
encouraging real reform in the Chinese currency
regime.
In conclusion, the entire
international community must work together
cooperatively to address global imbalances, but it
is a matter of extreme urgency that China act
immediately to increase the flexibility of its
exchange-rate regime before real harm is done to
its own economy, to its Asian neighbors, and to
the global
financial system.
