Playing The China Card
Washington noodles Beijing over its currency
Can China be bullied? U.S. policymakers are about to find out.
Last week, Chinese Premier Wen Jiabao sternly told a group of American businessmen that easing China's fixed-exchange-rate policy on its currency was a matter of Chinese "sovereignty." "The politicization of an economic matter," he warned, "will not be conducive to resolution of the issue."
The next day, Washington called his bluff. In its annual report on exchange-rate policies, the Treasury Department blasted China for threatening global economic growth--and its own economy--by keeping the yuan fixed at 8.28 to the dollar. "China is now ready to move to a more flexible, market-oriented exchange rate," the report declared, "and should move now."
So far, China hasn't followed the advice, although last week it did add tariffs to a handful of textile exports. And its own leaders have suggested that China will eventually ease its fixed-rate policy, like most other developed nations. The question is how long politics will get in the way. China fixed the yuan's value more than a decade ago, to help stabilize its fragile economy. Now, as China evolves into one of the world's industrial powers, experts say its currency is undervalued by between 15 and 40 percent. China's heft makes that problematic. It forces neighboring countries, like Singapore and South Korea, to keep their currencies undervalued, lest China gain a competitive advantage. But the 800-pound dragon is China's export sector, which benefits from a policy that floods the United States and foreign markets with cheap goods. America's swollen trade deficit with China--$162 billion in 2004 and likely to go higher this year--makes the exchange-rate issue an irresistible football for politicians to kick around.
Sanctions. The Bush administration, eager to avert a trade war, took a "middle road" in the treasury report, according to Ray Farris of Credit Suisse First Boston. Treasury didn't go as far as labeling the country a currency manipulator, since that could have triggered sanctions by Congress. But the Commerce Department did slap quotas on a small group of clothing imports. And sanctions are brewing anyway. A Senate bill would add a 27.5 percent tariff to all Chinese products entering the United States, unless China revalues its currency. That might help save American jobs in industries like furniture and apparel that have been decimated by cheap Chinese competition. But it would also raise prices and fan inflation. So far, that's not a worry on Capitol Hill. China faces "major pushback from the United States," vowed Republican Sen. Lindsey Graham of South Carolina, one of the bill's sponsors.
Credit Suisse estimates that if left alone, China might revalue the yuan by 3 to 5 percent as early as this summer, with more gradual easings to follow. But China will delay if seen to be bowing to U.S. pressure. Others think China first wants to shore up its weak banking system, with a fully fluid yuan not likely until China hosts the Olympics in 2008. By then, yuan floating might be an Olympic sport of its own.
This story appears in the May 30, 2005 print edition of U.S. News & World Report.
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