Backdown on yuan irks legislators By
David M Lenard
HUA HIN, Thailand - On
Wednesday, the US Department of the Treasury
issued on behalf of the Bush administration its
Semiannual Report on International Economic and
Exchange Rate Policies. Though the report
discussed many countries, media attention focused
almost entirely on the report's failure to cite
China as a "currency manipulator".
Treasury Secretary John Snow,
in his official press statement on the
report
, said: "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."
At a subsequent press conference, Snow
said the question of intent was crucial: "The test
in the '88 act ultimately comes down to intent,"
he said, noting that during last month's visit of
President Hu Jintao to the White House, the
Chinese leader had pledged to "increase the
flexibility of the exchange rate", in addition to
boosting imports and facilitating additional
foreign investments in China. Snow said these
actions indicated that "China has indicated the
intent to address imbalances".
Politically, the statement had the effect
of cooling tensions in US-China relations, which
have been troubled in recent years by China's
growing trade surplus by the United States,
considered to be caused at least partially by the
allegedly undervalued yuan. However, in terms of
US domestic politics, the decision may have had
the opposite result: many US legislators,
particularly those from industrial states with the
most to lose from competition with Chinese goods,
vehemently criticized the decision. In a legal
sense, while failing to name China as a "currency
manipulator" did not make US congressional action
against the country impossible, it did make it
procedurally more difficult, at least by removing
a potential argument from the arsenal of those who
have argued for being tougher with China on the
currency front.
Legislators 'tired of
happy face' US Senators Charles Schumer and
Lindsey Graham, who have proposed an eponymous
bill that would slap 27.5% tariffs on all Chinese
exports to the US in the event China failed to
revalue its currency, were among the first to
critique the administration's decision.
Schumer, a Democrat, said the Treasury
Department "always seem[s] to come right up to the
line, but then refuse[s] to cross it ... If the
administration is unable or unwilling to take
action on their own, then our bill is the only
option to get China to treat us fairly.'' Graham,
a Republican, said: "I am tired of talking, I am
tired of visiting, I am tired of 'happy face',''
adding: "If the yuan doesn't appreciate in a
significant [manner] between now and September, we
will have a vote.''
The Schumer-Graham
legislation has been depicted as a "nuclear
weapon" approach that would create strong
collateral damage with respect to US-China trade
and bilateral relations generally. Senators
Charles Grassley and Max Baucus have advocated a
bill generally viewed as more moderate, which
would require the Treasury Department to determine
when currencies are "misaligned" with the US
dollar and then mandate a variety of graded
responses, such as cutting off US loan guarantees
to Chinese firms.
But Baucus also
criticized Treasury's latest step, saying, "It's
time to change the way we do business on currency,
not only with China but with any other country
whose misaligned currency hurts the US economy."
Manufacturers, unions united in
opposition Industrial interests also
critiqued the step. Manufacturing and union
groups, often at loggerheads over other issues,
seemed uniform in their criticism of the Bush
administration's decision to let China off the
currency hook.
BusinessWeek quoted Kevin
Kearns, president of an organization for small and
medium-sized manufacturers, as saying that Snow
"has been consistently rolled by the Chinese
government".
Furthermore, the US "comes
off as a paper tiger unwilling to stand up for its
domestic industrial sector", said Auggie Tantillo,
executive director of a lobby group for US textile
firms.
And Richard Trumka,
secretary-treasurer of the American Federation of
Labor-Congress of Industrial Organizations
(AFL-CIO), the US industrial union, complained
that President George W Bush and the Treasury
Department have proved that "when it comes to
China, they are all bark and no bite ... With no
meaningful action coming from Washington, China
will continue to undervalue the yuan."
The Chinese reaction Yi
Xianrong, a research professor with the Institute
of Finance under the Chinese Academy of Social
Sciences, said the US report was not a surprise.
In Yi's view, the US report affirmed China's
reforms in its forex policy, which will encourage
Beijing to take more measures to ease its forex
controls, such as implementing a qualified
domestic institutional investor (QDII) scheme
which will allow Chinese investors to trade in
overseas securities despite the yuan remaining a
not fully convertible currency. The liberalization
of the yuan is in China's own interest, Yi said,
so Beijing will push forward its forex reforms,
with or without any foreign pressure.
Some
welcomed the more conciliatory US approach that
the step seemed to suggest. HSBC economist Qu
Hongbin said in a research note: "While external
pressure sometimes does help to push forward
reforms in China, it needs to be gentle. Any tough
pressure would have been counterproductive."
Yuan closing on 'eight
barrier' The immediate reaction on the foreign-exchange
markets was for the yuan to speed up
its steady appreciation of recent weeks, as it closed
in on the psychological barrier of 8 yuan to
US$1. On the Chinese market, the yuan exchange rate
closed at 8.0048 yuan/dollar on Wednesday. It is
now generally expected that the yuan will continue
to appreciate, so that within this week or the
next US$1 will exchange for less than 8 yuan.
Joseph Yam, chief executive of the Hong
Kong Monetary Authority (HKMA), wrote in his
latest weekly column on the HKMA website that
continued revaluation of the yuan is a general
trend: "There may be some psychological effects on
the market as the yuan exchange rate passes
through certain levels."
A forex trader in
Shanghai said the US
report would not have a significant impact on the
trend, noting that the yuan's appreciation is
being driven by market forces, with a weaker US
dollar further fueling yuan revaluation.
In addition, at least one dealer at a
Chinese state bank expected accelerated
strengthening of the yuan, telling Reuters that
the current market response is "the calm before
some real reaction ... The US decision is regarded
as a concession, and China is expected to respond
with some sort of goodwill gesture to allow the
yuan to rise in the coming weeks."
What
does it mean? The decision can certainly be
regarded as a win for Chinese diplomacy, since
numerous statements by Chinese leaders in recent
months clearly were intended to avert the
escalation of tensions that could have resulted
from China being cited as a "currency
manipulator".
With their allergy to
instability, the Chinese leadership undoubtedly
feared the potential consequences of a drastic
move on the yuan, and with China's economy growing
at annual rates of 9% and greater, there was a
strong incentive not to rock the boat. Of course,
this had to be balanced against the disastrous
consequences for the Chinese economy if anything
like the Schumer-Graham bill - which would have
sent Chinese exports tumbling - had been enacted.
In effect, Beijing gambled that a
transition to a more liberal currency system last
July, coupled with a gradual but steady
appreciation of the yuan since then - totaling
about 3% altogether so far - would be enough to
satisfy the United States, given the political
balance of forces in Washington. So far, this bet
seems to have paid off; but the outraged reaction
by many US politicians cited above (which was
noticeably bipartisan) shows that the danger of
stronger action from the US has not passed.
From the US point of view, the action was
predictable even months ago, and recent events
have made it even less likely that the Bush
administration would take strong action against
China. The administration obviously has enough on
its plate internationally without aggravating
relations with China; furthermore, it still hopes
for China to play a constructive role in resolving
the crises in Iran and North Korea.
In
addition, of course, Republican administrations
are historically business-friendly, and the
increasing dependence of US corporates on China -
as shown by the rapturous reception President Hu
received at Boeing and Microsoft, which contrasted
sharply with his much cooler reception in the US
capital - has put political pressure on the White
House to go easy on the China-currency issue.
The vast Chinese holdings of US government
debt also certainly contribute to this
unwillingness to "get tough", though that issue
cuts both ways, since, as many commentators have
pointed out, declines in the dollar also cut the
buying power of China's dollar-denominated
holdings.
Although the early reaction
in the currency markets was a stronger yuan, it
is not clear whether this trend will be sustained.
As the previously quoted Chinese bank dealer
noted, the yuan might be allowed to rise in the
coming days because of the perception that Beijing
needs to return a US favor with a goodwill
gesture; but this factor will only be significant
in the short term. In the long term, assuming the
government intends to continue restraining yuan
appreciation to its currently very slow rate, the
Treasury Department statement could make this
easier to accomplish, by relieving the pressure on
China to act faster.
David M
Lenard is a correspondent for Asia Times
Online in Thailand.
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Asia Times Online Ltd. All rights reserved. Please
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