Additional US pressure on the
yuan By Zhou Jiangong
SHANGHAI - From the Tiger Leaping Gorge in
remote, mountainous southwestern China to Qinghai
Lake on the sublime Tibet-Qinghai Plateau, Henry
Paulson, the US treasury secretary, always shows
his passion on China's environmental protection.
But on top of the agenda of his weekend
trip to China is still the yuan issue. The visit
follows up the second round of the Strategic
Economic Dialogue in May, which did not make any breakthrough
on
China's currency issues.
"This trip is
part of an ongoing process to strengthen our
strategic economic relationship - to address
long-term issues such as working with China to
rebalance its growth and increase the flexibility
of its currency," said Paulson.
The trip
is just days after the second anniversary of
China's so-called exchange-rate reform. On July
21, 2005, China de-pegged the yuan, its currency,
from the US dollar and allowed it to appreciate
against the greenback by 2.1%. Since then, the
yuan has been on a path of slow appreciation and
is going up a bit faster this year.
The
timing is also subtle. US politicians are
increasingly impatient with the alleged
"undervalued yuan" that they think gives Chinese
companies an unfair trade advantage over the
United States.
Just before Paulson left
for China, the US Senate Finance Committee voted
20-1 on Thursday to give the US government new
tools to press China on the yuan revaluation,
although the administration of President George W
Bush said it opposed the bill. The overwhelming
vote shows Congress is headed toward passing
legislation by a big enough margin to overcome any
presidential veto, said Senator Charles Schumer, a
Democrat who helped craft the measure.
The
sponsors of the bill presented to Congress in May
are confident that it will pass with a veto-proof
margin. Specifically, it would require the
treasury secretary, in consultation with the
Federal Reserve Board chairman, to issue
twice-yearly reports that review, evaluate and
analyze currency markets, currency-intervention
policies of the United States' major trading
partners, identify and determine so-called
fundamentally misaligned currencies, and develop a
priority list for actions.
The bill's most
significant provision requires the Commerce
Department to take "currency undervaluation" into
account when calculating anti-dumping duties on
foreign goods, said Senate Finance Committee
chairman Max Baucus, a Democrat. That could lead
to higher duties already in place on many Chinese
products, and encourage US companies to seek new
duties on additional Chinese goods.
A
Department of the Treasury statement said that
Paulson would "raise with Chinese leadership
issues of concern to the US Congress in his
meetings there". The leaders include President Hu
Jintao and Vice Premier Wu Yi.
More
international economists have been persuading
Chinese government to allow yuan to appreciate
faster. More mainstream economists in Beijing
believe that yuan appreciation will be a necessary
step to address spiking structural issues embedded
in China's economy and largely in China's own
interests, instead of the United States'.
In fact, the appreciation of the yuan has
been accelerating. Its appreciation in the second
year after the de-peg is at a rate tripling that
in the first year. The market expects that the
yuan will gain 5% in 2007, meaning that a US
dollar would be valued at 7.4 yuan by end of the
year.
Employment of millions of workers in
export-oriented factories in coastal provinces is
the major concern of the Chinese government on
yuan appreciation. But the two-year appreciation
has shown that China's export juggernaut has not
lost its steam and is becoming even more robust.
According to a survey by China Business
News, a leading business newspaper based in
Shanghai, nearly half of export-oriented companies
in the Pearl River Delta and the Yangtze River
Delta, China's two most dynamic export bases, said
the yuan's appreciation does not have any impact
on their employment plans, and more than a quarter
of companies said they might cut the number of
workers by less than 5%, and some factories are
even considering an employment increase.
In January-June 2007, China's trade
surplus was US$112.47 million, two-thirds of the
surplus in all of 2006. The sustained ballooning
trade surplus assured the government that a bit
faster appreciation does not hurt China's export
momentum.
In the short term, beyond the
knowledge of Capitol Hill politicians, yuan
appreciation may be responsible for the fast
growth of China's trade surplus. Yuan appreciation
instantaneously makes China's export goods more
expensive in dollar terms, but increments of
appreciation may not have any impact on the volume
of exporting at all.
To contain the
ever-growing exports, the Chinese government,
which is more confident handling the pace of
appreciation, needs either to accelerate the
appreciation or use other policy tools for more
balanced trade, or both. However, analysts say
that while Beijing may allow greater flexibility
of the yuan, it will resist letting the yuan float
freely. In other words, Beijing still sticks to a
gradualist approach, though this time it is a more
aggressive one.
This is what the
government is doing. For the second time in 12
months, China reduced or scrapped altogether tax
rebates to 2,381 export good items. The government
on Monday announced a new policy that seeks to
curb the development of the processing trade in
labor-intensive industries covering 1,853 products
in plastics, furniture and textiles and other
industries. The policy will take effect on August
23.
Paulson said he will also address
short-term issues "as they arise".
Consumer-goods safety could be one of the
short-term issues. In recent months, the US Food
and Drug Administration has tightened its checks
on goods imported from China, and US media have
been bashing "made in China", from pet food,
toothpaste and seafood to tires. Acknowledging the
goods-safety issues and strengthening the
crackdown on inferior producers, China is
criticizing the US media for "demonizing" China's
goods. As a retaliatory measure, China is
tightening its checks on goods from the US.
Climate change could be one of the
dominant issues in the fourth round of economic
talks to be held in Beijing in December. "The only
way to make progress on climate change is to
engage all the large economies, developed and
developing, to work toward embracing cleaner
technology and reducing emissions," Paulson said.
The Bush administration, reluctant to be a
leader in reducing emissions and recognizing that
China one of the biggest emitters of pollutants,
is intent on using the economic-dialogue forum to
bring China on board to deal with harmful
emissions by shouldering more responsibilities.
Zhou Jiangong is a
Shanghai-based analyst on China's economic,
political and foreign affairs.
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