U.S. Renews Push on China's Yuan

Officials Say Beijing's Vow
Of Flexibility in Currency
Has Shown Paltry Results

By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL
September 16, 2005; Page A2

WASHINGTON – The Bush administration is turning up the heat on Beijing to allow the Chinese yuan to rise against the dollar, reigniting an economic dispute that had appeared settled.

Treasury Department officials are disappointed that China's eight-week-old promise to let the yuan move with market forces has resulted in only a tiny increase in its exchange value. They warn that Beijing is courting a backlash from U.S. lawmakers who say China's undervalued currency is robbing American companies of business and American workers of jobs.

Treasury Secretary John Snow has invited the Chinese finance minister, Jin Renqing, to meet during a gathering in Washington on Sept. 23-24 of senior economic officials from the Group of Seven major industrialized nations. The Chinese have indicated they plan to attend, but haven't yet formally accepted.

"The secretary will emphasize the need for the Chinese to demonstrate that the regime they've put in place will allow for greater flexibility in the yuan," said a Treasury official. In essence, Mr. Snow plans to tell the Chinese that it's not enough to say that the yuan can rise; they must also allow it to do so in a significant way.

"There has to be movement," the official said, although the administration doesn't have a specific percentage figure in mind.

The yuan had been fixed at about 8.3 to the dollar for more than a decade when Chinese officials, facing intense U.S. and European pressure, announced on July 21 that the currency would be immediately revalued by 2.1% and allowed to move in a way that would reflect the dictates of supply and demand. Since then, however, the yuan has barely budged and the currency has climbed a total of just 2.37% since the announcement.

In public, Treasury officials diplomatically say they understand the Chinese need time to implement the new system. "We have been very supportive of the reforming of the exchange-rate regime, but implied in that support is taking them at their word that over time they'll achieve greater flexibility and an exchange rate that increasingly reflects underlying supply and demand," Timothy Adams, Treasury's undersecretary for international affairs, said in an interview. "We expect that to occur."

Congressional actions -- both past and prospective -- leave little time for patience. The Treasury Department is due to release on Oct. 15 a biannual report to Congress on international currencies, and Mr. Snow promised months ago that unless China implemented significant reforms the fall report would "likely" cite China for manipulating its currency to gain an edge in international trade. That would trigger a legal requirement that the U.S. initiate formal negotiations with China over the currency question.

Mr. Snow is scheduled to travel to China in mid-October, and Treasury is likely to delay release of the report until after his return, Mr. Adams said.

The renewal of the confrontation comes at a time of tension in a spectrum of U.S.-China issues, from textile trade to copyright piracy to Chinese bids for American companies. In a meeting in New York this week, Chinese President Hu Jintao told President Bush that he would address U.S. concerns about its $162 billion trade deficit with China and about Chinese intellectual-property violations, according to Mike Green, the White House China expert.

Mr. Bush, who plans to visit China in November, also raised with Mr. Hu concerns about the yuan. "It's in China's long-term economic interests and the world's economic interest for China to make further moves toward a flexible and market-oriented exchange rate," Mr. Green told reporters after the two leaders met.

While monetary authorities rarely announce currency moves in advance, the Chinese appear to be signaling that they don't plan another revaluation soon. Yu Yongding, a member of the monetary policy-making committee of the People's Bank of China, told Dow Jones Newswires recently that the Chinese authorities "need another, say, four or five months" to evaluate the new currency regime before making any big moves.

"I don't know if there will be further revaluation in the short term," said Mr. Yu. "The authorities need time to observe the effect of the small revaluation on economic growth that itself is in the process of changing even without the revaluation."

Many U.S. manufacturers, represented by groups like the National Association of Manufacturers, are pressing their representatives in Washington to take stronger action against China. "We are very disappointed in the way the Chinese have actually put their new regime to use," said Frank Vargo, NAM's vice president for international economic affairs. "It looks a lot like the old regime, except 2% up, which is trivial."

At least two anti-China bills are looming in Congress. One, sponsored by Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) would impose a 27.5% tariff on all Chinese goods entering the U.S. to counterbalance the allegedly unfair advantage the yuan's weakness gives Chinese companies over their U.S. competitors.

The administration opposes that bill as far too sweeping a punishment, and after talks with Mr. Snow and Federal Reserve Chairman Alan Greenspan this summer, the sponsors agreed to hold that bill back in anticipation of what turned out to be China's July 21 announcement of its new approach to the yuan. The bill is likely to resurface, however, particularly if Sens. Schumer and Graham feel the administration isn't being tough enough on China, by, for example, failing to brand China a currency manipulator in the October report.

A separate bill, already passed by the House and awaiting action in the Senate, would allow the Commerce Department to impose import duties against Chinese goods to counter the effects of government subsidies to Chinese firms.

"Protectionist pressures are really there," said the Treasury official. "Aside from something Katrina-related, there would be no more popular bill on the Hill right now than something protectionist aimed at China."

The Chinese authorities "have to recognize that," the official said.