Snow in Senate

Snow repeats call for China forex reform
By Glenn Somerville
ReutersThursday, May 26, 2005; 10:55 AM

WASHINGTON (Reuters) - U.S. Treasury Secretary John Snow repeated on Thursday that China can and must adopt a flexible currency to help ease trade tensions with the United States and the rest of the world.

In remarks to the Senate Banking Committee -- parts of which were published in advance in the Wall Street Journal -- Snow said the U.S. cannot shrink its trade deficit without the help of key trade partners.

Not only must China make its yuan currency more flexible, which U.S. competitors say would let its value rise relative to the dollar, but Europe and Japan must do more to spur their economies and to create demand for American-made goods.

As the hearing opened, committee members made clear they are upset with China and prepared to initiate legislative action -- something the U.S. Treasury is aiming to head off -- unless China accepts that its currency is undervalued.

"China wants the advantages of free trade and not the responsibilities," said New York Democratic Senator Charles Schumer. "When they have an advantage, they're all for free trade.

"When they have a disadvantage, they come up with all sorts of reasons, excuses or just abject violation of trade rules to avoid it," Schumer added.
The U.S. Treasury chief said the United States needs cooperation from its trade partners. including Asia.

"Our actions alone will not be sufficient to unwind global imbalances," Snow said. "Simply put, large imbalances will continue if growth in our major trading partners continues to lag."

Snow's remarks set a stern tone ahead of a scheduled June 10-11 meeting of finance ministers from the Group of Seven -- the United States, Britain, Canada, France, Germany, Italy and Japan -- in London June 9-11.

It was unclear whether China will send representatives to the London meeting, but it has let it be known it will introduce currency reform on its own terms and timing.

Snow was testifying on a report issued last week, in which Treasury found no major trade partner, including China, currently manipulates its currency for trade advantage. However, he repeated the report's admonition that China faces being named as a manipulator -- potentially making it liable to trade retaliation -- unless it adopts a more flexible currency.

China currently pegs its yuan, also known as the renminbi, at about 8.28 to the dollar, a practice that angry U.S. manufacturers and lawmakers claim leaves Chinese imports as much as 40 percent undervalued and makes it impossible for American companies to compete.

"China's rigid currency regime has become highly distortionary," Snow said. "It poses risks to the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows, and over-investment."

Snow said China's pegged currency also was a threat to its neighbors, given China's growing might as a trading power and the need for it to contribute to sustained global expansion.

At the moment, Snow said, the global economy was experiencing robust growth and he expected the U.S. economy also to keep growing strongly.

He acknowledged the United States has large trade and budget deficits but spurned the idea of setting a target for an acceptable level of deficit on the current account, which measures trade in goods, services and capital.

"We do not, and will not, have a current account target," Snow said, adding the best course of action for the United States was to keep the economy growing solidly.

But Europe and Japan need to do more.

"Simply put, large imbalances will continue if growth in our major trading partners continues to lag," Snow said, referring to Japan and Europe.

"These economies must continue to adopt and implement vigorous and necessary structural reforms to establish robust rates of growth -- both for the good of their own citizens and to contribute to reductions in the imbalances in the global economy."

Treasury Secretary John Snow Testimony before the Senate Committee on Banking, Housing and Urban Affairs on the Treasury Department's "Report to Congress on International Economic and Exchange Rate Policies."

WSJ : China's Obligation Snow's Opinion article in WSJ.