Sep 16, 2010

Washington against Chinese currency intervention

Washington criticizes  Chinese currency intervention on Wednesday  and  the US administration has filed two new cases against Beijing at the World Trade Organisation in this connection, sources said.

The moves are aimed to crank up pressure on Beijing to change what the US says are distortionary and illicit measures to favour its own companies.

Tim Murphy, a Republican congressman from Pennsylvania, appeared at a House of Representatives hearing on Wednesday to promote a bill that would allow the US to treat Chinese currency undervaluation as an illegal export subsidy when imposing emergency tariffs.

"The American people are calling for Washington to create jobs. Since the administration won't hold China accountable, the Congress must."

Separately, the US trade representative (USTR) filed two WTO cases against China, one concerning Chinese restrictions on foreign suppliers processing credit and debit card payments, and another challenging China's own use of emergency tariffs against US steel exports.

"In both cases, USTR is fighting for the American jobs threatened by China's actions and insisting on the level playing field promised in our WTO agreements," said Ron Kirk, the USTR.

China let its currency rise again on Wednesday for the fifth trading day in a row, bringing the appreciation of the Chinese currency against the dollar over the last week to 0.8 per cent -- a relatively large move in the context of China's highly cautious currency management.

But Mr Murphy dismissed the action, saying that it was a short-term sop to US opinion ahead of this week's two-day congressional hearing. Tim Geithner, Treasury secretary, is due to testify on Thursday.

"Don't be fooled by yesterday's news that the yuan hit a new high against the dollar -- this is a repeat of past history," he said. Since June, China has let its currency appreciate by only about 1 per cent against the dollar.

The bill follows a similar push in the Senate led by Charles Schumer, the Democratic senator from New York. With a crowded legislative calendar, the bills will struggle to become law before the midterm elections in November but may be picked up again next year.

The bills would allow estimates of currency undervaluation to be used in so-called "countervailing duties", emergency tariffs imposed against imports deemed to be unfairly subsidised. Trade lawyers are divided over whether such a move would be compatible with World Trade Organisation rules, and they could spark litigation from China. Some observers have suggested the US bring its own case against China to the WTO over currency manipulation, though that would take years.

The move to accelerate appreciation of the currency follows the weekend publication of data showing that China's economy was stronger in August than most economists had expected, while inflation continued to rise.

However, many analysts believe the real reason for the shift in strategy is escalating political pressure from the US.

Chinese leaders have stated on several occasions that they will not adjust their exchange rate policy as a result of foreign pressure. Yet the recent currency strength, which started immediately after a visit to Beijing by Lawrence Summers, President Obama's leading economic policy advisor, has left some observers with the opposite impression.

China announced in June that it was abandoning its de facto currency peg with the US dollar -- also after considerable pressure from Washington. However, until last week, Beijing had allowed only very modest movement in the dollar exchange rate, while the renminbi had actually weakened against a basket of the currencies of its main trading partners.

With the prospect of a protectionist backlash in the US rising, Beijing also faces the risk that other G20 members will pick up the issue at the next summit in November if the renminbi does not continue to rise. Japan's decision to intervene in the currency market on Wednesday and the prospects of similar moves from some other Asian countries underlined the exchange rate pressure that other governments in the region are facing.

Robert Zoellick, head of the World Bank, said that a stronger currency was in China's interest because it would help stimulate the required rebalancing of the economy towards domestic demand and consumption. "Appreciating the renminbi would send a pricing signal that could reinforce the direction of these structural reforms," he said on Wednesday in Beijing.

However, he added that currency appreciation was "not a panacea" and that China also needed to address the underlying structural issues that have led to high savings and investment.

Mr Zoellick said he did not expect the US to experience a double-dip recession. But he warned that "the US economy will have a relatively slow-growth recovery" and that "unemployment will likely remain relatively high" while Europe also faced "a slow-growth picture".

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