U.S. calla revaluation a good start for Beijing
(New York Times)
Updated: 2005-07-25 15:26

The Bush administration welcomed China's move toward a more flexible currency on Thursday, but the cautious shift may not be enough to cool the anti-China sentiments boiling up in Congress.

Treasury Secretary John W. Snow called it "the start of an awfully important process" that might resolve one of the biggest economic disputes between the United States and China.

"It is very positive," Mr. Snow told reporters on Thursday morning. "I am particularly struck by the commitment of the Chinese government to get their currency into alignment with market forces."

But the ambiguity of the Chinese announcement, in which it said it would uncouple the value of the yuan and the dollar, made it impossible for administration officials to say whether it amounted to a real change or a token gesture.

One senior administration official noted that Chinese leaders continued to describe their currency policy as "managed."

China's currency policy is merely one element of a much broader anxiety. With the United States building up a trade deficit with China that could exceed $180 billion this year, anti-China sentiment in both parties is so high that even ardent free-trade advocates are prepared to vote for new restrictions.

Indeed, lawmakers in both parties warned on Thursday that China could inflame resentments if its first initial step - a 2.1 percent upward revaluation of the yuan - did not lead to much broader revaluation. Critics have charged for years that China was giving itself an unfair trading advantage by keeping its currency at an artificially low value against the dollar, which made its exports to the United States cheaper than they would otherwise be.

"It is a good first step, albeit a baby step," said Senator Charles E. Schumer, Democrat of New York and co-sponsor of a bill that would threaten China with steep tariffs on its exports if it did not significantly change its currency policy. "If there are not larger steps in the future, we will not have accomplished much."

House Republican leaders, meanwhile, were still hoping to pass a bill as early as next week that would make it easier for the United States to retaliate against Chinese exports that are subsidized by the government.

Many economists estimate that the yuan is at least 15 percent undervalued.

But analysts also agree that China would still have extraordinary cost advantages even if the yuan were allowed to float freely.

As a result, the political tensions are likely to remain high as American officials grapple with complaints about piracy of American technology and entertainment, restrictions on American investment and a host of other issues.

"The overwhelming sentiment of the nation, which is reflected in Congress, is that we should be taking a more aggressive stance and holding China accountable to world trading standards," said Representative Benjamin L. Cardin, Democrat of Maryland and a leading point man for House Democrats on trade issues.

Mr. Cardin dismissed China's announcement on Thursday as "inadequate" and predicted that it would have little impact on political sentiment in Congress.

For the last two years, Mr. Snow has been trying to persuade China through polite diplomacy that a more flexible currency would be in its own interest.

But while Chinese leaders professed their agreement in principle, they had balked at any actual change. Mr. Snow stepped up his rhetoric in April, saying that China was ready and should move "now."

The real progress came only after the Senate in early April came close to passing the bill sponsored by Mr. Schumer and Senator Lindsey Graham of South Carolina.

In June, the Bush administration warned that China's currency policies were tantamount to currency manipulation and implied that it would take action if China failed to do anything by October.

C. Fred Bergsten, president of the Institute for International Economics, a policy research organization in Washington, said Chinese leaders were hoping their hesitant first step on currency policy would defuse both political pressure and financial pressure.

"My guess is they are trying to see the minimum they can get away with," Mr. Bergsten said. "My own sense, based on historical experience, is that this won't do anything to reduce either kind of pressure, and, in fact, it might increase both kinds of pressure."

Representative Phil English, a Pennsylvania Republican and sponsor of a bill that would retaliate against government-subsidized exports from China, was skeptical as well.

"If this is a last best offer," Mr. English said Thursday, "it is unacceptable."

Administration officials cautioned on Thursday that China's change on currency policy was unlikely to have a big or quick impact on the economy or on the United States' trade deficit.

The immediate change is by all accounts inconsequential: an upward revaluation of the yuan by 2.1 percent being minuscule compared with China's inherent cost advantages.

But China's central bank also outlined a process by which it might allow a looser currency policy. In its statement, the People's Bank of China said the yuan would be allowed to fluctuate as much as 0.3 percent against the dollar each day.

Taken literally, that could mean the dollar could be in for a long slow decline in value against the yuan, which would make Chinese products more expensive and American exports cheaper.

But it remains unclear if the central bank will allow that to happen, and Bush administration officials admitted on Thursday that they did not know.

Alan Greenspan, chairman of the Federal Reserve, said the Chinese move amounted to a cautious step toward a more market-based economy.

"I think they've been cautious, and I think admirably so, but I look at it as a first step in a number of further adjustments as they invariably increase their participation in the world trading market," he said.

(courtesy of the New York Times)

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