US

Pressure on yuan 'may backfire'

By Wang Bo and Lan Lan (China Daily)
Updated: 2010-09-17 10:56

China rejects US demands over currency

BEIJING - China warned on Thursday that obsessing over its yuan currency would not resolve trade issues in the United States and "might make things even worse".

"Adding pressure will not resolve trade issues between China and the US," said Foreign Ministry spokeswoman Jiang Yu. "The country's exchange rate reform will only be pushed forward in accordance with economic conditions and balance of international payments."

Jiang's remarks came in response to earlier comments by US Treasury Secretary Timothy Geithner, who said he was dissatisfied with the pace of the yuan's appreciation in testimony at two congressional hearings on Thursday that addressed China's currency policy.

The yuan was traded at 6.72 against the greenback on Thursday, its highest level since June 19, when the central bank announced that it would deepen reform of the mechanism governing the yuan exchange rate to improve its flexibility.

The Chinese currency has gained 1.6 percent against the US dollar since that date. But US officials are still worried.

"We are concerned that the pace of appreciation has been too slow and the extent of appreciation too limited, Geithner said in remarks to the US Senate Banking Committee on Thursday. "We are examining the important question of what mix of tools, those available to the US and multilateral approaches, might help encourage the Chinese authorities to move more quickly (on yuan appreciation)."

Geithner also expressed concern about a controversial congressional proposal to levy taxes on China for its currency policy during a hearing Thursday before the the House Ways and Means Committee, saying US should use more multilateral measures toward China.

The proposed bill was introduced last year by House Rep Tim Ryan (D-Ohio) and Rep Tim Murphy (R-Pennsylvania). It will essentially classify an undervalued currency as an illegal subsidy and counteract the subsidy in the form of tariffs or other taxation measures.

The House Ways and Means Committee has held four hearings on the Chinese currency issue this year and Geithner is the first official from the Obama administration to testify for the panel.

Geithner first told the committee about the importance of the US-China economic relationship and the challenges US businesses face in China. Though he criticized the Chinese currency and the ongoing exchange rate reform by the Chinese government, he said multilateral approaches may help encourage Beijing to move more boldly. He said the international forums, including the Group of 20 and the International Monetary Fund, can be more effective to achieve that goal.

"The more effectively we use the international institutions, the more likely we can make an impact on China," he said.

The Treasury secretary told the committee that his department will take China's actions into account in the next Foreign Exchange Report, which is due on Oct 15. The Treasury Department did not label China a currency manipulator in its report earlier this year despite pressure from Congress.

Earlier Thursday, Geithner made similar testimony about China's currency policy before the Senate Banking Committee. Recently many congressmen have urged the Obama administration to send stronger signals to Beijing about the yuan.

Geithner, like many US trade experts and groups, said he was worried that the proposed bill by Reps Ryan and Murphy will hurt US economic interests as it may violate World Trade Organizations (WTO) rules. He said the bill could invite strong retaliation from Beijing.

After a House Ways and Means Committee hearing on Wednesday, more members of Congress said they would support the Ryan-Murphy bill. A total of 145 House representatives - 102 Democrats and 43 Republicans - have sponsored the bill, according to the Fair Currency Coalition, a Washington-based group representing manufacturers, workers and farmers.

On Wednesday, about 100 lawmakers sent a letter to the House calling on a vote on the bill. House Speaker Nancy Pelosi said a decision on how to proceed with the proposed legislation would be made after the hearings.

The jobless rate in the US reached 9.6 percent in August, prompting Obama to unveil a slew of tax cuts and infrastructure projects to spur economic growth.

The US demands and pressure on China's currency policy have been viewed by economists as a political ploy ahead of the US' midterm elections.

They said the ploys could divert the public from the state of the US economy.

"It is simply a political game," said Ding Yifan at the State Council Development Research Center. "The yuan issue is easy to attack as the Democrats fear midterm election losses."

In New York, Stephen Roach at Morgan Stanley Asia said that "with the election season in hand, the drumbeat in Congress is getting louder and the Obama administration and the Democrat party in general are in serious trouble. The rhetoric is led more by politics than by global economics," he said in an address to some 200 members of the Council on Foreign Relations on Thursday morning. "If we think for a moment that we are going to solve this problem by bashing the Chinese we are deluding ourselves."

Roach said the main problem for the US is the lack of national savings, which is now at minus 2.5 percent of GDP. "So we need to import more surplus savings from abroad in order to grow. And Congress is clueless, it does not understand this."

Jacob Frenkel, chairman of JP Morgan Chase International, said the issue will not be solved unless the gap in savings between China and the US is filled.

He said the US should have a more constructive dialogue with the Chinese to develop financial markets. That will transform the debate into a constructive situation for everyone, Frenkel said.

Yu Yongding, economist and former central bank adviser, said that it is essential not to exaggerate the effects of currency appreciation on the balance of trade.

"The exchange rate is just one of many factors which affects trade balances," Yu said. "It is worth noting that the income effect of global demand is significantly larger than the exchange rate on China's trade balance."

Bill Rhodes, senior vice-chairman of Citigroup Inc and Citibank, said blaming the yuan's exchange rate is not reasonable. "There are lots of reasons for the imbalance of trade, such as the rate of savings. Adjusting exchange rates cannot solve all the problems. Just look back at what happened in Japan."

Chen Weihua in New York and Tan Yingzi in Washington contributed to this story.

China Daily