Sun, Dec 05, 2004 - Page 10 News List

China not manipulating exchange rate, US insists

TRADE DEFICIT The US Treasury dismissed complaints from manufacturers, saying that China is laying the groundwork for a market-based flexible exchange rate


The Bush administration once again declared that China is not manipulating its exchange rate, dismissing loud complaints from some manufacturers and members of the US Congress that the country's undervalued currency is badly aggravating the US trade deficit.

In a report released late Friday afternoon, more than a month after a congressional deadline, the US Treasury Department said China is "laying the groundwork for a shift to a market-based flexible exchange rate."

Though not unexpected, the decision appeared timed to attract as little attention as possible on an issue that has provoked political debates in many states that have been hard-hit by imports from China.

The report also came at a moment when US Treasury Secretary John Snow is widely rumored to be on his way out. White House officials have let it be known they do not want Snow to stay more than six months, even though Snow has made it clear he would like to stay on for a good portion of US President George W. Bush's second term.

The Treasury Department was supposed to deliver the report in October, but officials said at the time that they would not deliver it until after the elections.

By law, the administration is required to begin exploring sanctions against any country that it deems to be manipulating its currency to gain an "unfair trade advantage."

But Snow has adamantly rejected all proposals to threaten China with retaliation, contending that the only way to persuade Chinese leaders would be with arguments that flexible exchange rates are in their own interest.

The US trade deficit with China is expected to exceed US$120 billion this year -- by far the biggest trade imbalance that the US has with any other country and bigger than that with the entire European Union.

That trade deficit could grow even larger next year, as longstanding restrictions on a broad array of textiles and clothing are scheduled to expire.

China has pegged its currency, the yuan, at a fixed exchange rate to the US dollar for nearly 10 years. Many economists contend that the fixed exchange rate has caused the yuan to become increasingly undervalued -- perhaps by as much as 40 percent -- and made Chinese exports to the US cheaper than they would be otherwise.

Though China's biggest competitive advantage is its vast pool of low-wage workers, an undervalued currency makes a country's products cheaper in foreign markets.

To keep the yuan's value locked at the rate of 8.3 to the US dollar, the Chinese government has bought up vast sums of dollars and dollar-denominated securities over the last two years. Its foreign reserves grew by US$47 billion in the first half of this year, hitting a total of US$471 billion.

China's fixed peg to the dollar has caused other Asian nations, especially Japan, to prop up their own currencies by buying up hundreds of billions of dollars more. Japan bought up US$138 billion in foreign reserves in the first three months of this year, and its foreign exchange reserves total more than US$700 billion.

In the report, the Treasury Department repeated its position that the administration is trying to persuade China to adopt a more flexible exchange rate for its own good.

"The administration has urged Chinese leaders to move as soon as possible to greater flexibility, and has initiated an unprecedented level of engagement," the report contended.

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