By Zhou Jiangong and Jing-dong Yuan
Under increasing pressure from the United States and from domestic economic
problems mainly caused by excessive liquidity, Chinese officials are weighing
various measures to reduce the growth of the country's trade surplus.
Beijing may let its currency, the yuan, gradually appreciate by allowing a
broader floating band for its exchange rate, but there is little likelihood of
any immediate or drastic action.
China's total trade surplus was US$22.5 billion in May, up 73% over May of the
previous year, making the financial system awash with cash.
In the latest move by US lawmakers to address China's trade surplus with the US
- a record US$232.5 billion in 2006 - they introduced legislation in Congress
on Wednesday that would punish countries that manipulate their currency for
unfair trade advantage. The US Treasury Department on Wednesday agreed that
China's currency is undervalued, but declined to label China a "currency
Many in the US argue that the yuan is deliberately undervalued by as much as
40%, making Chinese goods artificially cheaper and contributing to the US trade
deficit with China.
The planned US legislation is clearly intended to tap into international
pressure. There is a "growing international unhappiness about China's
exchange rate policy," wrote Pieter Bottelier, the former chief of World
Bank mission in Beijing and a current economic professor at Johns Hopkins
University, in an article for China Business News, a leading business newspaper
based in Shanghai.
At the same time, in its semi-annual report on the international economy and
exchange rates, the US Treasury noted that China's and the world's stake on the
yuan had never been higher.
"Heavy intervention by China's central bank has led to excessive
accumulation of foreign exchange reserves and a quick increase in domestic
liquidity, which increases the risk of overheating, a build-up of
non-performing loans leading to banking sector stress, and asset bubbles. This
trend clearly increases the risk of a renewed boom-bust cycle, which would be
quite harmful for the global economy," says the report.
The planned bill also underlies congressional disillusionment over the
effectiveness of the Bush administration's current trade policy toward China,
ie, engagement via the US-China Strategic Economic Dialogue (SED), the
bi-annual process that has become gatherings of economic heavyweights of the
world's largest economy and its fastest growing one.
Indeed, critics of the administration policy could point to the modest progress
made at the second round of SED session last month in Washington in which the
currency issue was discussed without any breakthrough.
So what to do?
China's Premier Wen Jiabao this week reiterated to cabinet members his concern
over excessive liquidity and "too much trade surplus".
Decision-makers are clearly aware of the damage to the economy by the excessive
trade surplus and ever-growing foreign exchange reserves. Indeed, giving the
yuan more flexibility might be more in the interests of China than in the
interests of the US.
Inside the circle of trade-related central government departments in Beijing,
there is agreement on a so-called "neutral trade policy", but how to
attain the goal seems extremely difficult and at times emotional.
Wen pledged to increase imports and contain exports by scrapping tax rebates
for exports enjoyed by pollution-causing and recourses-costing goods.
Wen appears to be trying every policy instrument except a dramatic appreciation
of the yuan, that is, using fiscal and monetary policy instruments that curb
excessive liquidity and expanding channels to spend foreign exchange reserves
and to facilitate the outflow of capital.
Some economists have also recommended sharp increase in salaries for Chinese
workers, which would have the same effect in terms of raising the cost of
Ultimately though, China might have no alternative but to accelerate the
appreciation of the yuan. To keep its international credibility, analysts
suggest that China should refrain from intervening in the foreign exchange
markets and thus the yuan will appreciate faster until the market thinks it's
The dangers of doing this are fears that a fast appreciation would kill the country's
export-reliant industries, resulting in skyrocketing unemployment that would
jeopardize the country's economic and social stability.
Looking for a fight?
The sponsors of the bill presented to Congress on Wednesday are confident that
it will pass with a veto-proof margin. Specifically, it would require the
Treasury secretary, in consultation with the Federal Reserve Board chairman, to
issue bi-annual reports that review, evaluate and analyze currency markets,
currency intervention policies of the US's major trading partners, identify and
determine so-called fundamentally misaligned currencies, and develop a priority
list for actions.
While Senator Charles Grassley, one of the sponsors, indicated that the bill
was not intended to start a fight with China and hoped that the Chinese
government would get the message and begin adjusting its currency policy, the
bill threatens exactly such a fight.
A Chinese Foreign Ministry spokesman warned against politicizing bilateral
economic issues and using pressure to settle disputes. But so far Beijing's
response has been firm yet measured.
Meanwhile, the issue has become politically charged as the 2008 presidential
election approaches and as a Democrat-controlled Congress is more willing to
contest the administration's China policy, including its handling of the
The coming months will determine whether the two countries are headed for a
showdown or whether Beijing and Washington could find a mutually acceptable
solution to head off a crisis. Judging by the way past looming crises and trade
wars were averted, an 11th-hour compromise is not out of the question. However,
this will require both sides to make adjustments, and unilateral action could
only exacerbate the already tenuous situation.
The Bush administration is likely to continue resisting congressional pressure
over China for pragmatic economic, but also for important geostrategic reasons.
China continues to present as an alluring future market and has over the past
few years become one of the largest importers of US goods and services, which
registered more than $50 billion last year and continues to grow in
double-digit rates. China's financial and service sectors offer potentials that
US companies can ill afford to ignore, while a trade war would likely lead to
retaliation against American business interests.
Nor does Washington want to see a trade tussle derail productive cooperation
with Beijing on issues ranging from North Korea's nuclear disarmament, Iran,
the global "war on terrorism" to global warming and the disaster in
Darfur, Sudan, where China could exercise measurable influence.
But the administration cannot fight the bill alone and it needs help. In this
regard, Beijing could do itself a big favor by demonstrating - if not
implementing outright - its willingness to allow greater appreciation of its
currency that addresses the need to restructure its economy for long-term
sustainability and averts a head-on collision with a galvanized US Congress
determined to pick a fight.
Copyright 2007 Asia Times Online Ltd.
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