U.S. to judge China’s yuan policy as elections near

By Doug Palmer

WASHINGTON (BestGrowthStock) – President Barack Obama’s administration faces a tough call on Friday whether to label China a currency manipulator, a move many U.S. lawmakers say is overdue but one that could sour Sino-U.S. relations.

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 Obama to cite China for the first time in 16 years.

But concern about angering the United States’ largest creditor argues for a continuation of diplomatic efforts that have resulted in a nearly 2.5 percent rise in the value of China’s yuan currency over the past several months.

It is a fine line to walk, and many observers think Obama will opt to play it safe with Beijing and give it another pass.

One possibility is that the administration will refrain from labeling China a currency manipulator, another option is to delay the report.

China on Friday left little doubt about the rancor that would ensue if it is branded a currency manipulator.

“It is entirely wrong for the United States to make an issue of China’s trade surplus and hence put pressure on the yuan exchange rate,” commerce ministry spokesman Yao Jian said.

“The Chinese yuan should not be a scapegoat for United States’ domestic economic problems,” he said at a briefing.

A U.S. industry official, speaking on the condition of anonymity, said he thought chances have increased that the Treasury Department would label China a currency manipulator when it releases the semi-annual report.

“The tone of the rhetoric has changed,” the official said, referring to a recent speech in which Treasury Secretary Timothy Geithner argued forcefully that markets, not governments, should determine exchange rates.

Washington says Beijing could help rebalance the global economy by reducing its reliance on exports and letting the yuan rise. This would ease the pressure soaring currencies are placing on many other emerging market economies, Geithner has said.

China in turn has argued that moving too quickly with currency reforms could devastate its economy, and has blamed the United States for its loose monetary policy that has weakened the dollar and pressured developing economies.

LETTER OF THE LAW

The Treasury Department is mandated by law to issue a report every six months on whether any country is manipulating its currency for an unfair trade advantage.

U.S. lawmakers, including House of Representatives Ways and Means Committee Chairman Sander Levin and Senate Finance Committee Chairman Max Baucus, both Democrats, have long hurled that charge at China.

But the last time any administration — Republican or Democrat — has cited a country under the 1988 currency law was in July 1994, when China was put in the spotlight.

Geithner delayed the April 15 report until July 8 to give China more time to act on its own, and shortly before a summit of leaders from the Group of 20 nations in late June, Beijing unshackled the yuan from a nearly two-year peg to the dollar.

While the move was initially welcomed by the Obama administration, it became a source of irritation when the yuan barely rose in subsequent months.

It has risen faster since two top White House advisers visited Beijing in September, but not enough to stop the House from approving legislation allowing the United States to slap duties on imports from countries with fundamentally undervalued currencies.

In an article published on Friday, Chinese central bank governor Zhou Xiaochuan pledged a continuation of yuan reform, but only on Beijing’s gradual terms.

“The yuan exchange rate will be basically stable at a reasonable and balanced level,” he wrote in China Finance, a magazine published by the central bank.

Derek Scissors, a research fellow at the Heritage Institute in Washington, said: “The odds still are that Treasury won’t cite.”

However, he hedged his bet, saying many in Congress now believe “the yuan only moves when political pressure is high. That argues for finding manipulation this time.”

The administration might also want to cite China in the hopes of reducing the chance the Senate approves the currency bill already passed by the House, out of concern the legislation could spark retaliation from Beijing.

In congressional testimony last month, Geithner suggested it would be meaningless to cite China because under the 1988 law it would only trigger consultations, noting that the administration was already talking with Beijing.

“I think we can say with certainty that Mr. Geithner is of the view that naming them a manipulator has no practical consequence and therefore shouldn’t be done,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. “The real question is whether or not political forces are going to force him to name China.”

(Additional reporting by Aileen Wang in Beijing; Editing by Todd Eastham and Tomasz Janowski)

U.S. to judge China’s yuan policy as elections near