Posted on 02/04/2005 5:27:53 AM PST by TigerLikesRooster
US bill aims to shake China off the peg
HONG KONG - If China does not ease controls on its currency within six months, it will face a 27.5% tariff on all exports to the US under legislation to be introduced in the Senate on Friday. According to Wes Hickman, a spokesman for Senator Lindsey Graham, a South Caroline Republican who is sponsoring the bill, along with Senator Charles Schumer, a New York Democrat, the bill, if approved, will require China to "abide by international trade agreements and stop manipulating the value of the yuan".
Reacting to the news, Chinese Foreign Ministry spokesman Kong Quan said legislation "is not the right way ... We believe the currency issue in the final analysis should be conducive to the economic development of a country. China's stable, sustained and rapid development is not only conducive to China itself but is also mutually beneficial to trade cooperation between China and Asia and all countries in the world."
Amid charges that the (undervalued) yuan is causing havoc on the US economy, at least a dozen senators from both the Republican Party and the Democratic Party have agreed to co-sponsor the bill, a reflection of the frustration in Congress over China's refusal to move to a market-based exchange rate, despite pressures by the Bush administration. Schumer and Graham offered a similar measure last year as well, but withdrew it in favor of diplomatic negotiations.
The senators were to testify on Thursday before the US-China Economic and Security Review Commission, which is currently holding hearings on Chinese trade. The commission, a Congress-sanctioned panel pushing for a tough US approach on China, is examining China's record of compliance of its World Trade Organization (WTO) commitments and weigh options of using US trade laws and WTO mechanisms for addressing trade problems.
The Chinese peg, which keeps the yuan undervalued against the dollar by 15-40%, depending on who makes the estimates, is one of the main reasons behind the record US trade deficit with China, the commission noted last year.
The yuan, pegged at 8.27 to the US dollar, is kept in a narrow band by the People's Bank of China. The Bush administration believes the range is too weak, made worse by the recent weakening of the dollar. In a report earlier this month, the commission estimated that the "artificially low value of the yuan" subsidizes Chinese exports and is a virtual tariff on foreign imports, helping China to enjoy significant trade surpluses. The US trade deficit with China widened to over $396 billion between 1998 and 2002. The deficit is already one-fourth the total US deficit with all countries.
As a result, the US claims that it lost 1.5 million jobs to China between 1998 and 2002. In particular, the US manufacturing sector has lost over 2,600,000 jobs since March 2001, which accounts for approximately 90% of the total US job losses. The Chinese government, according to the findings of the commission, has intervened in the foreign exchange markets to hold the value of the yuan within an artificial trading range, violating the spirit and letter of the world trading system.
The Chinese central bank refused to comment on the bill. A leading Chinese government economist told Bloomberg that China wouldn't be swayed into changing its currency policy. "This kind of bill comes up every year and will keep being raised in the future," said Zhu Baoliang, chief economist at the State Information Center, a research group under China's top economic planning agency. "I don't think Chinese government officials will change their stance."
Last year, Graham and Schumer decided to give the US administration more time to persuade China to free the peg and did not push to have the bill to the Senate floor for a vote, spokesman for Graham, Kevin Bishop, was quoted as saying. "The Chinese are not taking the administration seriously, so we have to show [them] we are serious about it [this time]," he said.
Apart from this bipartisan bill, some lobby groups in the US are planning a series of actions to make the Chinese toe the US line. The National Association of Manufacturers, a powerful lobby of American factory owners, plans to urge the International Monetary Fund and the US Treasury Department to get China change its currency regime. The group wants the International Monetary Fund to crack the whip on China as a cheap yuan gives Chinese exporters an advantage. It also wants the Treasury to declare that China is manipulating its currency.
The Chinese establishment has consistently made it clear that it does plan to change the currency peg at some time, but is in no hurry to do so and will definitely not be seen doing it under pressure. "We do not have a specific timetable for changing the exchange rate regime. We have to take into account several elements," Chinese Vice Premier Huang Ju recently told the World Economic Forum in Davos. "We need to have a stable macroeconomic environment, well-established market mechanisms and a healthy operational system. This is the first prerequisite." When pressed on the yuan issue, central bank deputy governor Li Ruogu said, "Leave this issue to the Chinese people and the Chinese government. We will certainly figure out what is the most suitable approach for China's economic development."
One of China's prime arguments against a yuan relaxation is speculation. In the last two months of 2004, China's forex reserves jumped to $67.5 billion, widely seen as evidence that large amounts of speculative capital have been pouring into China in anticipation of a rise in the yuan. China also wants to clean up its banking sector first to insulate it from any shock arising from a yuan regime change. China's banks are burdened with over $500 billion of bad loans.
China's stand has to some extent been vindicated by none other than the chairman of the US Federal Reserve, Alan Greenspan. Taking a different line from the growing chorus for yuan's free float, the high priest of American finance has warned in the past that any hasty decision to float the yuan could weaken the Chinese banking system and threaten the world economy. In a letter to the Senate, he made it clear that a free float could cause a heavy flow of capital out of China, which would in turn undermine Chinese banks and destabilize the world economy. "Many in China fear that removal of capital controls that restrict the ability of domestic investors to invest abroad and to sell or to purchase foreign currency, which is a necessary step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilizing the system," he said in the letter.
But pressure has been mounting on China from the highest quarter in the US administration. On Wednesday, President George W Bush said at a press conference that if China allowed its currency to trade on open markets, it would help reduce the US trade deficit. "In terms of the trade deficit, it is important for us to make sure that countries treat their currencies in market fashion ... I've been working with China, in specific, on that issue," Bush said.
China has, however, kept its window of dialogue open. It is sending its central bank governor and finance minister to the Group of 7 meeting in London this weekend, where the leaders of the industrialized nations are expected to make a fresh appeal to China to relax the yuan. But analysts say there is very little chance of Beijing bending. And arm-twisting tactics like the proposed US bill will only steel China's resolve against giving in.
This may be why China suddenly hardened her stance on N. Korea.
A complex game.
Ping!
Very complex indeed. And the PRC play the long game.
This bill won't even make it out of committee. There are way too many congressmen on the Chinese payroll.
I hope PRC's ass is on fire before the game reaches its conclusion. Fire set by angry peasants, whose leaders are Chen Sheng and Wu Guang.:)
What is FreeRepublic for? Win or lose, put some major heat on them as much as possible.
I wonder if Hillary is selling short in Dollar Tree?
While buying up Chinese-made condoms.:)
It seems the currecny peg is the only thing the adminsitration actually cares about.
And the peg is the most supeficial one.
Here's a snip from DOBBS last night:
Well, lawmakers on Capitol Hill tonight are taking action to put a stop to China's unfair trade practices. At least they're trying. Senator Chuck Schumer of New York and Senator Lindsey Graham of South Carolina today proposed legislation that would impose a 27 percent tariff on Chinese goods imported into this country.
Lisa Sylvester reports from Washington.
(BEGIN VIDEOTAPE)
LISA SYLVESTER, CNN CORRESPONDENT (voice-over): When it comes to China's currency advantage, two prominent senators are sick and tired of waiting for the Bush administration to act.
SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: And as we fiddle, Rome is burning. We're losing jobs unfairly.
SEN. CHARLES SCHUMER (D), NEW YORK: And so we're tired of verbiage. We're tired of timetables without specific dates and specific numbers. And it's time to act.
SYLVESTER: Senators Charles Schumer and Lindsey Graham have proposed a 27-1/2 percent tariff on goods imported from China to take effect in six months unless China revalues its currency. China has been artificially pegging its currency to the dollar so that its goods are cheaper on the world market.
The result has been a $160 billion U.S.-China trade deficit and the loss of scores of American jobs. The Bush administration has taken the soft-handed approach, using diplomacy, but patience is running thin for some on Capitol Hill, as evident in a U.S.-China Commission hearing today.
RICHARD D'AMATO, U.S.-CHINA COMMISSION: The Chinese know a warning when they see it. It's whether or not the administration is going to be serious. If the administration was serious and the Chinese thought there was going to be penalties, the administration was going to put on, the Chinese would move.
SYLVESTER: But many lawmakers believe that most Americans, if given the choice of low prices at the store or their jobs, they would choose jobs.
SYLVESTER: When asked if the tariffs would be considered a trade violation, Schumer and Graham said they welcome the Chinese to take their case before the World Trade Organization. Maybe then, they say, China will be forced to refigure its currency rate -- Lou.
DOBBS: Not only the difficult and complex relationship with China, but also the extraordinary subordinate position the United States puts itself in vis-a-vis the World Trade organization. My, oh, my, what will the WTO think of it all.
Aired 2/03/05 http://transcripts.cnn.com/TRANSCRIPTS/0502/03/ldt.01.html
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