Posted on 05/17/2005 6:34:45 PM PDT by familyop
NEW YORK - The Bush administration has put China on notice that it expects a revaluation of the yuan within six months.
In its biannual report to Congress on exchange rates and trade, the U.S. Treasury said China will be at risk of being accused of unfairly manipulating its exchange rate if it doesn't act swiftly to abandon its fixed exchange rate against the dollar.
For the past ten years, the yuan has been pegged to trade in a narrow band around $8.28. Beijing has repeatedly said it will widen the band, making the yuan more flexible in time, but the head of China's central bank denied again last week that a revaluation was imminent.
The Treasury report can be seen as the administration's response to a bill put forward by Senator Charles Schumer, D-N.Y., that would impose heavy sanctions if China does not revalue in the next six months.
The report and a statement from U.S. Treasury Secretary John Snow played a major role in turning around U.S. stocks Tuesday afternoon after they had been hammered on inflation fears when strong Producer Price Index and monthly housing starts numbers were posted before trading began. The Dow Jones Industrial Average posted a second straight day of gains--rising 79.59 points to 10,331.88.
The Treasury report makes clear that China would meet the requirements of being named a currency manipulator if there is no substantial change in its currency regime within six months.
"It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," the Treasury report says.
"It is critical that we address the issues of imbalances aggressively," said Snow's statement. "China's rigid currency regime has become highly distortionary. It poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows and overinvestment," he added.
The Treasury is now saying that China should take an immediate transitionary step towards a full float of its currency, but that Beijing doesn't need to move immediately to a full floating rate regime. This could be as straightforward as a significant widening of the yuan's trading band.
U.S. Congressmen and U.S. export manufactures would welcome an immediate signal of intent to allay their concerns about the U.S. trade deficit with China which they argue is being increased by what they say is China's artificially cheap currency.
China's bilateral trade surplus with the U.S. expanded in the second half of 2004 to $93.5 billion, compared to $70.2 billion in the same period the previous year.
China's global current account surplus had increased to $40 billion in the second half of last year, or 4.2% of gross domestic product--roughly twice as large as the surplus in the second half of 2003.
Though China has already been working on financial market deregulation for two years, preparing to loosen the yuan's peg to the dollar, and has gradually sought to give its financial institutions more experience operating in foreign exchange markets. China's capital markets would require substantial further liberalization to sustain the impact of a fully free float.
Further interest-rate liberalization is also crucial. If the central bank loses its exchange-rate control over monetary policy, it needs to be able to affect either of the only two alternative policy tools: a target interest rate or a target inflation rate, and targeting the latter is impractical.
Earlier this month, Vice Finance Minister Li Yong told the annual meeting of the Asian Development Bank meeting that China had to first get its market mechanisms in order and repair its corruption-ridden and bad-debt burdened banking system.
Many in Congress have been critical of the administration softly jawboning the Chinese authorities over the issue of the yuan. But the administration has been reluctant to take a more forceful approach, in public at least, for fear that the Chinese authorities won't want to be seen within China as bowing to foreign pressure, and particularly not American and Japanese pressure. (Tokyo has made similar calls for revaluation.)
Note that the Treasury report is diplomatically couched in the language of global economic imbalances rather than the bilateral U.S.-China relationship,
"The fixed exchange rate China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding adjustment of international balances. It is also a source of large and increasing risk to the Chinese economy," the report concludes.
If you demand a revaluation of the yuan, and it turns out to be a mistake, then don't complain.
An easy way to deal with China's monetary/trade policy that doesn't require groveling before trade tribunals and is constitutional - impose tariffs.
Floating Chinese currency might be a DISASTER for both sides! China does not have a good banking system.
who cares. what are you worried about, that if they float, that the slowing chinese economy will mean they buy less US exports? so what, right now, we lose more from the US economy from the industries and jobs being exported to China - then we gain from exporting to them.
we are just going to rip through wave after wave of US industries they get ripped apart and sent to china - its not just simple stuff like xmas tree lights and toys, or home appliances, they will now take the whole textile industry, semiconductors and tech and high tech manufacturing, they will soon be coming for biotech, and we have all seen the ominous signs regarding autos. where does it end? the answer is, it doesn't end, until the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives.
since we can't overcome the political and treaty issues to impose across the board tariffs on them - breaking the currency peg is the next best thing.
Whooweeee!!! Wouldn't want thay now would they.
<< .... restore "moderate" / "well calibrated" tariffs .... >>
What rubbish.
"Tarriffs" is simply another word for tax.
If tarriff/taxes are imposed they will penalize and be paid by US -- not china.
it won't be a mistake.
to claim you are for the peg, is the same as saying the peg should be even lower. if the peg is good for the US at its current level, then it would be better if china depreciated its currency even further, right? I mean, if the peg is good, then a lower one would be better. that pair of Dockers coming into the US at $4.75, why can't it come in at $3?
the problem with people who see the peg as the ticket to cheaper US consumer goods - don't see the flipside (like I do at work) - the creation of an aritificially low cost zone with an essentially infinite labor supply, into which US industry is investing, unbolting plant and equipment from factories in the US ans sending it over to China along with those jobs.
we have essentially made China an "enterprise zone" for US industry.
if china floated, we would see a 40% appreciation in the value of their currency. it will not float lower, its impossible.
how long have we been talking about this here? years. finally, someone in the administration is coming around (slowly) and sees what is happening.
And what is wrong with it? Tariffs are much better tax than tax on wages! Tariffs were the original tax in USA, not the income tax, don't you know?
That is a good argument. Let me see if I can find a flaw in it....
Maybe if they set the peg at 0 dollars to the yuan.... That's lower, right??
So they'd be giving their stuff to us for free.
Why is that bad?
Didn't we hear the exact same thing about Japan in the 1980's? Please...
the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives
Please, do not insult us with such nonsense. Technology driven business, logistics driven business, transportation business, etc, PLUS all the infrastructure support required for those businesses, will all remain strong.
Maybe you need to let your finger do the walking through the Yellow Pages and see how many businesses are truly "threatened".
The best thing we can do to compete with China and other nations is to dismantle the PC controlled government school system and make them compete with each other so we can be better equipped to compete with the world and WIN!
because its effect is to suck in all capital investment of western industries, pulling jobs out of those economies, as the companies search for profits from the "free stuff" they can then turn around and import tariff free.
that's why its bad. to be a consumer, I first have to have a job. to pay the costs of our government, we first have to have a tax base.
go through the yellow pages yourself, you'll find mostly services. that's what the US economy is becoming - services and government.
"Floating Chinese currency might be a DISASTER for both sides! China does not have a good banking system."
But...but...
Didn't Arthur Andersen swear on a stack of financial disclosure documents that China's economy is growing faster than anyone else's?
you ignored all my serious points and replied to my light hearted attempt at humor...well?
Infrastructure. Business investments.
Right now, the under-valued Yuan makes China *appear* to be a better investment than the reality. This government currency intervention scheme has caused and is causing new business investments to go to China that would *not* ordinarily occur in a free market (e.g. one without massive government currency intervention).
Moreover, China's currency manipulation allows Chinese firms to get away with "dumping," that is, selling products below their real cost in order to drive competition out of business.
Thus, American jobs are directly lost due to unfair Chinese currency intervention.
In the short-term, this is *great* for the American consumer...for longer periods, however, this sort of Market Manipulation hammers American corporations, profits, hiring, firing, jobs, pensions, etc.
And it isn't sustainable. Eventually, China will be forced to re-value their Yuan...and the longer it takes to reach that point, the more damage to the global economy will occur. For 2004, China had a $120+ Billion trade surplus...but China spent $195 Billion on the global currency markets to keep their Yuan under-valued. That sort of game can't last forever.
In short, China's currency manipulation is a stealth subsidy of their own manufacturers...a currency manipulation that would be illegal if it was performed in any other way besides under valuing their Yuan.
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