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Snow Slaps China's Wrist On Yuan
Jessica Holzer, 05.10.06, 6:45 PM ET
Despite its infinitesimal progress on loosening its grip on the yuan, China narrowly escaped being branded a currency manipulator in a long-awaited report from the U.S. Treasury.
Still, the largest single contributor to the U.S. trade deficit did not emerge unscathed. The report had stern words for the Chinese government, and Secretary of the Treasury John Snow told a live briefing an hour later that he was "extremely dissatisfied" with the pace of reform. But the Treasury nonetheless said it was "unable to conclude" that China managed its currency to unfairly boost its exports-cold comfort to those who think the yuan is undervalued against the dollar by as much as 40%.
"I think the report is a disappointment and a step backward," said Morris Goldstein, an economist at the Institute for International Economics in Washington. "I would characterize the [Treasury's] policy as 'whine and whine, huff and puff, and decline.' "
However, other experts felt that the Treasury had little choice but to give China a pass lest it offended the Middle Kingdom's sense of sovereignty.
"Naming China a manipulator would have risked spurring China to dig in rather than reform," argued Brad Setser, the head of research at Roubini Global Economics in New York.
It is unclear whether the Treasury's verdict will fan protectionist flames on Capitol Hill. Branding China a currency manipulator has no substantive effect: The label only requires the U.S. to open talks with the country in question, which it has already done with China. But a guilty verdict might have emboldened lawmakers who have been clamoring to impose sanctions on China.
"If they had done it, it would have really given ammunition to those in Congress who want to pass protective legislation," argued Ben Carliner, the director of research at the Economic Strategy Institute in Washington.
Some of the protectionist measures amount to little more than empty threats. Sen. Chuck Schumer (D-N.Y.) and Sen. Lindsey Graham (R-S.C.) have a bill that would slap a 27.5% tariff on all Chinese imports. But shoppers at the likes of Wal-Mart Stores, Target and Kmart are unlikely to welcome such a tax on their purchases.
Meanwhile, a more moderate bipartisan proposal from Sen. Charles Grassley (R-Iowa) and Sen. Max Baucus (D-Mont.) stands a better chance of passing. The two top senators on the Finance Committee want to pass a law that would require the Treasury to vote "no" on any World Bank loans or other development assistance to any country with a currency that is "fundamentally misaligned."
There is little doubt that China keeps its currency artificially cheap to boost its exports. It has racked up an enormous trade surplus with the world, with the U.S. bearing the brunt of its export-led growth policy: Last year, the U.S. trade deficit with China hit a record $202 billion. Meanwhile, the Chinese have accumulated more than $800 billion in foreign reserves, most of them in dollars-glaring evidence of its intervention in the currency markets.
Since the Chinese revalued the yuan by 2.1% against the dollar last July, the currency has barely budged. Some economists point out that the Chinese currency appreciated by 9% against a trade-weighted basket of currencies last year. But that's because it was de-facto pegged to dollar, which appreciated against several major currencies, including the euro and the yen, in 2005, argues Goldstein.
Meanwhile, Russian President Vladimir Putin said in his state of the nation address on Wednesday that Russia's national currency, the ruble, should become fully convertible by July 1, following three years of preparation.
Many economists, including former Fed Chairman Alan Greenspan, argue that a big rise in the yuan won't help narrow America's gaping trade deficit because U.S. imports will simply shift to other low-cost producers. But there is little doubt that China's resistance on the yuan is having a dramatic impact on global trade: A cheap yuan has spurred other Asian countries to keep their currencies undervalued for fear of losing market share to China, argues Carliner.
"Everybody is sort of free-riding on China," he says.