U.S. Says China Should Let ‘Undervalued’ Yuan Rise (Update1)
By Rebecca Christie and Ian Katz
July 9 (Bloomberg) -- The U.S. pledged to monitor China’s “undervalued” yuan in the next three months for signs that Asia’s fastest-growing market is living up to its commitments to help rebalance the global economy.
China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher, the Treasury Department said yesterday. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation. The Treasury promised another review in October.
“What matters is how far and how fast the renminbi appreciates,” Treasury Secretary Timothy F. Geithner said, using another name for China’s currency. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”
The report reflected Geithner’s effort to avoid a confrontation with China over currency issues. The Treasury chief has repeated that it will be “China’s choice” when to let the yuan rise, deflecting pressure from lawmakers including Senator Charles Schumer who call for more appreciation and threaten to legislate trade sanctions.
Bought Time
“China has bought themselves some time by allowing the yuan to become unstuck a few weeks ago,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Despite its critics, China will be careful with its exchange-rate policy because the stakes are simply too great if they get it wrong, both for China itself and increasingly it could be a disaster for the world economy as well.”
The yuan traded at 6.7737 per dollar at 4:52 p.m. in Shanghai. It has gained 0.8 percent since Chinese policy makers’ announcement June 19 that they would allow greater fluctuation.
U.S. lawmakers weren’t convinced that Geithner made the right call. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he planned to hold a hearing on the report, and Schumer said the Treasury missed its opportunity to hold China accountable.
“This report is as disappointing as it is unsurprising,” said Schumer, a New York Democrat. “It’s clear it will take an act of Congress to do the obvious and call China out for its currency manipulation.”
Lawmakers’ Calls
Other lawmakers reiterated calls for the Obama administration to bring the currency issue to the World Trade Organization. House Ways and Means Committee Chairman Sander Levin and Senator Charles Grassley, the Senate Finance Committee’s top Republican, both called for the U.S. to file a trade complaint.
China’s currency has “appreciated only modestly” since last month’s policy shift, he said. “There is no real question that China’s exchange-rate policy is unfair, contributes to global trade imbalances, and costs the United States jobs and economic growth, particularly in the manufacturing sector.”
The report increases the chances of an October showdown, while also pushing off calls for action until January, when a new Congress may be less likely to press the issue, said Derek Scissors, a research fellow at the Heritage Foundation in Washington.
“The administration can more easily opt to call manipulation in October, saying they gave Beijing every chance to implement real policy change,” Scissors said. “But the manipulator tag itself does nothing but trigger talks.”
Full Document
The Treasury said the report covers the second half of 2009 and includes some information from the first half of 2010. The department said a full document on the first half of 2010 will be included in the Treasury’s next report to Congress, which is due in October.
Until last month’s shift, China had been holding its currency at about 6.83 to the dollar since July 2008 to help exporters. Authorities had allowed the yuan to rise 21 percent in the three prior years.
“China’s exchange-rate reform must be reinforced by macroeconomic policies that support domestic demand and other structural reforms to create a strong foundation for consumption-led growth,” the Treasury said. “Exchange-rate appreciation should play an important role in rebalancing China’s economy.”
U.S. Criticism
Companies in Asia and in the U.S. have called on China this year to let the yuan rise. Chinese executives including Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., and Qin Xiao, chairman of China Merchants Bank Co., said in March that China could benefit from an appreciation of the currency.
U.S. companies have criticized what they view as favoritism of Chinese firms over foreign competitors.
A January letter to the White House from the U.S. Chamber of Commerce, the Business Software Alliance, and more than a dozen other groups representing companies such as Microsoft Corp., Boeing Co., Motorola Inc., Caterpillar Inc., and United Technologies Corp. warned of “systematic efforts by China to develop policies that build their domestic enterprises at the expense of U.S. firms.”
Geithner opted to delay the report until after a series of meetings between U.S. and Chinese officials in Beijing and as part of Group of 20 policy discussions. After last month’s G-20 summit in Toronto, President Barack Obama said the U.S. will be monitoring markets to make sure that China follows through.
Market Forces
“We do expect that as more and more market forces come to bear, that given the enormous surpluses that China has accumulated, that the renminbi is going to go up and it’s going to go up significantly,” Obama said.
In its previous report in October, the Treasury criticized China for the “lack of flexibility” of the yuan and a buildup of foreign-exchange reserves while declining to call the nation a manipulator of its currency. It said China’s yuan policies were a “serious concern” and pledged to negotiate with China at the G-20 and the bilateral meetings.
China’s reserves rose to a record $2.447 trillion in the first quarter of 2010, according to the People’s Bank of China. Holdings jumped $22.5 billion in March, after gaining $9.4 billion in February and $16 billion in January, data posted on the central bank’s website in April showed.
Under a 1988 law, the Treasury is required to report to Congress twice a year on international economic conditions and exchange-rate policies. The Treasury is required to enter direct talks with a country deemed to be manipulating its currency, and also seek redress through the International Monetary Fund. The last country labeled a manipulator was China, in 1994.
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