US Currency Threat to China

Andrew Balls and Edward Alden, Financial Times

Washington renews presure on Beijing to let renminbi rise as trade deficit
fears grow. Republican senator in call for legislation.

Washington is again seeking to increase pressure on Beijing to allow its
currency to rise against the dollar, with threats growing in Congress to
consider legislation aimed at slowing the burgeoning US trade deficit with
China.

US pressure over the Chinese currency has been muted since last July when
China revalued the renminbi by 2 per cent and broke its decade-long exchange
rate peg to the dollar.
But the Bush administration and members of Congress are disappointed that
the renminbi has since been allowed to rise by less than 1 per cent against
the dollar.

While Chinese officials have consistently rejected international criticism
of their currency management, Wu Xiaoling, vice-governor of the People's
Bank of China, admitted that Beijing needed to open its capital account
further to create more foreign exchange demand and a more market-oriented
exchange rate.

Ms Wu told Caijing magazine that China should boost imports and encourage
more companies to go abroad to reduce the country's trade and investment
surpluses.

John Snow, US Treasury secretary, hinted strongly last week that his
department was likely formally to accuse China of being a "currency
manipulator" in its next report on trade and exchange rates, saying the
regime that Beijing introduced last summer had not led to greater
flexibility.

Treasury officials have sounded out investors and Wall Street traders on the
possibility of branding China a currency manipulator in the next instalment
of the twice-yearly report on currencies, required under the 1988 Trade Act.
While this would have no immediate practical impact, it would embarrass the
Chinese.

Under the 1988 Trade Act, the Treasury can formally identify foreign
countries for manipulating their currency, which triggers bilateral talks to
end the practice.

The US has cited China, Korea and Taiwan several times each since passing
the act, but China has not been named since 1994.

The US trade deficit rose to a record $726bn in 2005 — 5.8 per cent of gross
domestic product — over a quarter of which was accounted for by the deficit
with China.

Sabre-rattling on the renminbi may reflect US hopes that China might let the
renminbi rise to improve the mood ahead of April's Washington visit by
President Hu Jintao. The Treasury report is due next month, but is likely to
be delayed until after Mr Hu's visit.

Charles Grassley, Republican chairman of the Senate finance committee, said
last week he would start drawing up legislation to deal with the growing
array of US-China trade problems.