With lawmakers in the US Congress threatening a major confrontation with China over trade, the Bush administration will begin an intense campaign this week to persuade Chinese leaders that change is in their interest.
Today Secretary of the Treasury John Snow will lead a weeklong trip to China alongside Federal Reserve Chairman Alan Greenspan and other top US officials.
The trip comes at a decisive political moment, just a few weeks before the Bush administration is to decide whether to accuse China formally of manipulating its currency to increase its exports.
Lawmakers in both parties are vowing to punish China with steep new import taxes if it does not move more quickly toward a market-based exchange rate. They contend that the yuan is badly undervalued against the dollar, making Chinese exports cheaper than they otherwise would be.
But even as Snow prods Chinese leaders about their currency, administration officials are at least equally preoccupied with gaining more access to China for US financial institutions.
Snow's trip coincides with a huge conference in Beijing staged by Wall Street's biggest investment banks.
The result is what one Senate lawmaker called a "complex minuet" between US and Chinese officials. Under heavy pressure from the US, China took a first step in July toward flexible exchange rates by letting the yuan rise 2 percent against the dollar.
The Bush administration welcomed the move as a break-through, the beginning of the end to China's fixed exchange rate between the yuan and the dollar. Critics have complained for years that the yuan was badly undervalued, making Chinese exports artificially cheap and increasing its huge trade surplus with the US.
That surplus is approaching US$200 billion this year.
The Chinese government has amassed US$740 billion of dollar-denominated reserves, most of that in the last three years, to keep the yuan from rising in value.
But since its first tentative move China has not allowed any additional adjustments to the yuan. Now, lawmakers in both political parties are pressuring Snow to produce more results.
"If you see the Chinese again, tell them I don't think they are acting in the spirit of their move," Senator Charles Grassley, a Republican and chairman of the Senate Finance Committee, told Snow at a hearing last Thursday.
Senator Charles Schumer, a Democrat, warned on Friday that he would reintroduce legislation as early as Thanksgiving that would threaten China with tariffs of 27.5 percent on all its exports to the US.
Snow is in a tight spot. In April, he came close to formally accusing China of manipulating its currency, a move that would require direct consultations with Beijing and could lead to new trade restrictions. The Treasury Department will issue a follow-up report iearly next month, and Snow warned in April that he would accuse China of currency manipulation if it did not make substantial changes.
Administration officials are loath to threaten China, convinced that such tactics will simply stiffen the spines of Chinese hard-liners.
"It's our job here at Treasury to be a sober voice of reason," said Timothy Adams, undersecretary of the Treasury for international affairs. "Our job here is to promote free trade and capital flows and open markets."
Snow is going out of his way to make a big impression. He will arrive today in Shanghai, where he will see China's new foreign-exchange trading system and the Shanghai stock exchange. Then he will travel to Chengdu. On Friday, he will join up with Greenspan and Christopher Cox, chairman of the Securities and Exchange Commission, and Reuben Jeffery, chairman of the Commodity Futures Trading Commission.
Snow and Greenspan will attend meetings of finance officials from the Group of 20 large developing nations.
They have also scheduled a long list of meetings with Chinese leaders, including Prime Minister Wen Jiabao (溫家寶) and Zhou Xiaochuan (周小川), head of the central bank.
Zhou, who speaks fluent English and has close ties with US officials, told a Chinese financial magazine last week that China needed to re-examine its currency and look for ways to reduce its trade surplus.
Some US officials view the currency battle with China as a sideshow, contending that even a major upward revaluation of the yuan would provide little relief for manufacturers in the US.
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