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U.S. and China look to compromise on yuan

Undervalued yuan contributes to US$227b trade deficit in U.S. in 2009

U.S. and China look to compromise on yuan

Expectations are rising that China will revalue its currency after Washington held off on potential reprisals, but any adjustment may not be enough to mollify the anger of U.S. lawmakers and firms.
Treasury Secretary Timothy Geithner on Saturday delayed a semi-annual report scheduled for April 15 that could have declared that China was manipulating the value of its yuan, leading the way for trade sanctions.
The delay was widely expected after China said President Hu Jintao would visit Washington for an April 12-13 summit on nuclear security. China watchers say Hu would not dare come and risk the loss of face of a reprimand days later unless he had at least an informal assurance from the Treasury.
But with U.S. lawmakers clamoring for action on the yuan, all eyes are on China to see if it will reciprocate Geithner's gesture by revaluing its currency.
"I think the prospects (of a revaluation) have improved very significantly in the past few days," said Cornell University professor Eswar Prasad, who used to head the International Monetary Fund's China division.
One adviser to China's central bank, Li Daokui, recently called for an adjustment by September so it does not become an issue in U.S. mid-term elections two months later.
Prasad said that a smooth summit by Hu - including cooperation on unrelated issues - would make it easier for China to adjust its currency as it does not want to be seen as having been forced.
"But if the Chinese come under a lot of pressure from Capitol Hill, I think it could make it somewhat harder for the Chinese to move because in China there is a very vigorous debate" on revaluation, Prasad said.
U.S. lawmakers across the spectrum have accused China of deliberately undervaluing its yuan, leading to a flood of inexpensive goods and contributing to a trade deficit which soared to nearly US$227 billion in 2009.
A group of 130 Democratic and Republican lawmakers have urged Geithner to brand China a currency manipulator and warned that they would otherwise act on their own to slap tough penalties on China.
Senator Chuck Grassley, the leading Republican on the Senate Finance Committee, said he was "disappointed" in Geithner's delay in the report.
"Everyone knows China is manipulating the value of its currency to gain an unfair advantage in international trade. If we want the Chinese to take us seriously, we need to be willing to say so in public," he said.
But Obama's Democratic allies who lead Congress have said they will wait until the Treasury report before considering any legislation.
Even if China revalues its currency, the shift would likely be modest and may not stave off the criticism in the United States and European Union.
Alan Tonelson, a research fellow at the U.S. Business and Industry Council, which represents small and medium-sized manufacturers, argued that the yuan is around 50 percent undervalued and is causing a slew of U.S. factory closings.
"If China is successful in its goal of relieving the moderately mounting pressure on it, then the U.S. and world economies will face a very serious setback," Tonelson said.
"If the Obama administration starts to tout this as a major triumph for its own China policy, it will be sadly mistaken," he said. "The main question is whether Congress will be fooled."
China has recently made conciliatory signals to the United States after a rocky patch in relations after President Barack Obama met the Dalai Lama and his administration approved a weapons package to Taiwan.
Obama on Thursday spoke to Hu by telephone to seek to work together on one of the top U.S. priorities - tightening sanctions on Iran over its defiant nuclear program.
Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace, doubted that a yuan revaluation would change the larger economic dynamic between China and the United States.
"These pressures will continue in the foreseeable future because Chinese firms are very dynamic and it's a huge exporter," he said.
He noted that a readjustment could also hit U.S. consumers by raising the bill for now undervalued imports. "Chinese firms' weight on world markets will only continue to grow," he predicted.


Updated : 2021-01-19 02:13 GMT+08:00