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Treasury told china stop pegging currency to dollar Original Source Link: (May no longer be active)
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U.S. Says China Didn't Manipulate Yuan, Seeks Change (Update3)
May 17 (Bloomberg) -- The U.S. Treasury Department told China to stop pegging its currency to the dollar or risk being accused of manipulating exchange rates. The report disappointed lawmakers and manufacturers who pressed the Bush administration to say China is already in violation.
``Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and global economic growth,'' the Treasury report said in Washington today. China ``will likely meet the technical requirements for designation'' at some point without a ``substantial alteration'' in policy, the semiannual study said.
An outright declaration that China was manipulating exchange rates would have made it easier for Congress to impose sanctions. Lawmakers and manufacturers complain that China's decade-old policy of pegging the yuan, or renminbi, at about 8.3 to the dollar contributed to a record U.S. trade deficit and the loss of 1.1 million factory jobs in the past three years.
``I'm extremely disappointed that they're not taking direct action against China,'' Representative Benjamin Cardin, a Democrat from Maryland, said in an interview. ``What they do is hurting U.S. manufacturers and producers. It's unfair.''
Critics included senators from the president's own party. South Carolina Republican Lindsey Graham said ``our hope is the administration will build on this report and take it to China in a way that nobody can misunderstand: If you don't change you can expect major pushback from the United States.''
`Strange' Conclusion
Senator Charles Schumer, a New York Democrat, said at a press conference with Graham that the ``report is the toughest on China this administration has issued, but it's not quite tough enough.''
``They are manipulating their currency, and for the report not to find that is strange,'' Schumer said.
The U.S. hasn't accused any nation of tampering with its currency since 1994, and analysts said reluctance to do so may undermine the U.S. case for China ending the peg. Greg Anderson, a currency strategist with ABN Amro Holding NV in Chicago, said the Treasury had put China on notice that it would brand it a manipulator unless there are changes before the next study on Oct. 15. Today's report covers the second half of 2004.
``This one's signaling that next time we're going to cite them,'' Anderson said.
``The administration is walking a fine line between Congress and China,'' said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. While Congress wants a tougher protectionist approach, China may delay change if its leaders feel they're being bullied, he said.
Keeping Yuan Stable
China keeps the yuan stable by buying and selling it against the dollar. As the dollar has weakened 13 percent against currencies from its major trading partners in the past three years, the yuan has depreciated by the same amount, giving Chinese-made goods an advantage in world trade.
``They are manipulating,'' Allan Rodd, president of Wooster Brush Co. in Wayne County, Ohio, said in an April 28 interview. The firm employs 600 people and he said there's a ``significant threat that many of those jobs will disappear.''
John Engler, president of the National Association of Manufacturers, said his Washington-based trade group was ``disappointed'' with the Treasury's report. ``The language is about as hard-hitting as it can be without actually citing China,'' he said in a statement. ``But, getting to the one-yard line doesn't put points on the board,'' he said, using a term from American football.
The yen fell against the dollar and the euro today after a Japanese government report showed a decline in the country's consumer prices accelerated last quarter. The yen remained lower after the Treasury issued its report, falling to 107.27 at 3:10 p.m.
China's Surplus
China's trade surplus rose to about 4.5 percent of its economy from 1.5 percent in 2001. The U.S. trade deficit with China reached an unprecedented $162 billion in 2004, and the broader current account deficit ballooned to a record 5.6 percent of the U.S. economy. China's exports rose faster than its imports for a sixth straight month in April, its government reported yesterday.
Chu Maoming, a spokesman at the Chinese embassy in Washington, didn't immediately return a phone call seeking comment.
Effect on Trade
Economists such as Stephen King of HSBC Holdings Plc in London say that even if China acts, the effect on the U.S. trade deficit may be minimal. King calculates that even a 25 percent revaluation ``would scarcely make any difference'' because China accounts for less than 10 percent of total U.S. trade.
Other economists, including Nouriel Roubini of New York University, say a revaluation could hurt the U.S. economy if it results in China selling the U.S. Treasuries it now buys to maintain the peg.
In an effort to appease critics and intensify pressure on the Chinese, the Treasury included the new, tougher language in the report urging the world's most populous nation to let the markets play a larger role in setting the exchange rate. The most recent report before today's was released in December.
``While China's 10 year long pegged currency regime may have at times contributed to stability, it no longer does so,'' the Treasury report said. The peg distorts prices, creates international trade imbalances, draws speculative capital to China, and poses a ``large and increasing risk,'' it said.
End of Diplomacy
The stronger rhetoric follows Treasury Secretary John Snow's decision last month to end two years of ``quiet diplomacy'' and begin arguing China's economy and financial markets can absorb an immediate shift in the yuan. Fellow finance ministers from the Group of Seven industrial nations echoed that call after an April meeting in Washington.
``China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions,'' Snow told reporters today.
Snow explained for the first time that the U.S. is ``not calling for an immediate full float,'' but an ``intermediate step that reflects underlying market conditions and allows for a smooth transition -- when appropriate -- to a full float.''
He asked the International Monetary Fund to research the effects of China's currency regime on the world economy and international trade balances.
Congressional Pressure
The Senate is considering legislation that would impose duties of as much as 27.5 percent on Chinese imports until the peg is loosened. The House of Representatives is weighing a bill making it easier for companies to file complaints about the peg with the World Trade Organization.
Schumer and Graham said today they are reintroducing legislation that would give the Treasury more leeway in determining which countries are manipulating their exchange rates to get a trading edge.
The U.S. Commerce Department also last week moved toward reimposing limits on Chinese textile imports after determining that a recent surge in clothing shipments is hurting U.S. producers.
Former Treasury Secretary Paul O'Neill said warnings of protectionism would backfire. ``I don't think threats from Congress have very much weight in Beijing,'' he said in a May 9 interview.
China `Won't Bow'
Chinese officials have pledged to make their currency more flexible but won't set a schedule. Premier Wen Jiabao said yesterday that valuation of the yuan ``is the sovereign right of China'' and that ``while we respect market forces, we won't bow to foreign pressure.'' Wen's comments were reported by state news agency Xinhua.
No country was accused in the report of manipulating its currency, although South Korea, Thailand, Indonesia, and Taiwan regularly buy or sell dollars in an effort to affect exchange rates. Japan, which often buys and sells yen to affect its value, hasn't done so since March 16 2004.
``A peg or intervention does not in and of itself satisfy the statutory test'' of what defines manipulation, the Treasury said in its report. ``Nevertheless, Treasury has engaged with several economies, including some in Asia, to promote the adoption of market-based policies and regimes.''
China was the last nation singled out in a report by the Treasury, a decade ago, and the department has also previously cited Taiwan and South Korea.
Public Relations
Some economists such as Albert Keidel, who served as the Treasury's deputy director for East Asia until last August, say China cannot be accused because, aside from its massive trade surplus with the U.S., its total trade deficit is much smaller and its growth is led by domestic demand rather than exports.
``It would have been a stretch to say China is manipulating its currency,'' Keidel said.
Under a 1988 law Treasury is required to consider twice a year whether countries are pursuing exchange rate policies `for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.''
A conclusion that China manipulated its currency would have had little more than public relations value. Under the 1998 law, if the administration does determine countries are breaching U.S. rules, it must hold talks with those governments on adjusting exchange rates ``to eliminate the unfair advantage.''
Report Delayed
That's already happening, even without a formal designation. President George W. Bush and Snow have signaled their dissatisfaction with China's yuan for the past two years, using meetings in Beijing and of the G-7 to urge an end to the yuan's peg. Snow said today diplomacy is more likely to spur change than trade tariffs.
``Many of the bills going through Congress that target China are dependent on China being found guilty,'' said Stephen Jen, head of currency strategy at Morgan Stanley in London. ``There's no incentive for the Treasury to give politicians a green light to pursue protectionism.''
Snow is scheduled to testify to the Senate Banking Committee about the report on May 26, panel spokesman Andrew Gray said today.
Last Updated: May 17, 2005 16:21 EDT
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