Analysis: Retaliation in reserve as China faces yuan tensions

By Kevin Yao

BEIJING (BestGrowthStock) – Expect harsh words but no concrete retaliation from Beijing if the United States labels China a currency manipulator in a report due later on Friday.

China is focused on trying to defuse tensions with the United States by yielding some ground in a mini-burst of yuan appreciation and hopes that these efforts will still pay off, even if Washington brands it a manipulator.

But should the United States ratchet up the pressure yet further by passing into law a bill that could penalize China, Beijing will not be so docile, Chinese analysts say.

“China is telling the United States that it is willing to help to resolve the problems. Things have not gotten out of hand yet and both sides still have some room to maneuver,” said Zhao Xijun, an economist at Renmin University in Beijing.

President Barack Obama’s administration faces a deadline on Friday to decide whether to formally label China as a currency manipulator.

A desire to look tough on “unfair” trade practices ahead of U.S. congressional elections on November 2, in which Obama’s fellow Democrats are battling to retain control of Congress, could tempt the administration to cite China for the first time in 16 years.

The Chinese commerce ministry made its feelings clear on Friday, warning the United States not to make a scapegoat of the yuan. Rhetoric aside, though, Beijing knows that the currency manipulator designation carries no specific consequences, apart from forcing Obama to seek consultations with China.


A different calculus would apply if the Senate approved a bill already passed by the House of Representatives that would allow the United States to slap duties on countries with undervalued currencies.

“It will be a very serious issue if the U.S. legislation is approved by the Senate and signed by the president,” said Li Wei, a researcher under the commerce ministry.

For starters, China would challenge the U.S. law at the World Trade Organization — a case that some trade experts think China would be able to win.

Analysts say Beijing is also bracing for the law by considering possible retaliation, from imposing curbs on U.S. businesses in China to the so-called nuclear option of dumping its holdings of U.S. Treasuries.

But Beijing is not going to jump the gun. It is first taking what it sees as pre-emptive steps to keep U.S. anger from boiling over — and to keep the legislation from becoming law.

“If China doesn’t let the yuan appreciate a little bit, foreign criticism will be stronger. China wants to avoid a trade war with the United States,” said Guo Tianyong, an economist at the Central University of Finance Economics in Beijing.

To that end, Beijing has allowed the yuan to gain 2.6 percent since it scrapped a 23-month dollar-peg on June 19, quickening the appreciation in recent weeks as pressure mounted.


Ever sensitive to appearing weak domestically, Chinese leaders have insisted that the yuan’s rise is not a response to U.S. pressure but part of a broader reform agenda to spur domestic consumption.

They have also said that currency reforms will be done on China’s own gradual terms.

Central bank chief Zhou Xiaochuan told International Monetary Fund meetings in Washington that demands on China to let the yuan rise rapidly are akin to seeking a magic cure to a problem that requires a slow-working, herbal remedy.

Foreign ministry spokesman Ma Zhaoxu tried to inject some levity into the dispute on Thursday: “If appreciation of a currency could solve all of the world’s economic problems, then what use would economists be?”

But it will be no laughing matter if the United States follows up the currency manipulator report with real punitive measures.

Although retaliation by China would likely hurt its own interests, rising nationalistic sentiment on the currency issue might force the government to take a tough stance, analysts say.

“China wants to use diplomacy before a confrontation. It will have no choice but to engage in a trade war if all courteous means fail,” Guo, of the Central University of Finance Economics, said.

(Reporting by Kevin Yao; Editing By Simon Rabinovitch and Neil Fullick)

Analysis: Retaliation in reserve as China faces yuan tensions