An employee counts yuan banknotes at a branch of Bank of China in Taiyuan, Shanxi province February 10, 2010.
Credit: Reuters/Stringer
China said on Wednesday it "could not be any clearer" in its repeated commitment to a stable exchange rate after the U.S. Congress threatened to levy duties on some Chinese exports unless it revalues its currency.
The temperature in the long-running dispute over China's exchange rate regime is rising quickly, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to get Beijing to let the yuan rise.
Focusing on the yuan will not help to solve problems in the Sino-U.S. bilateral trade relationship, a Chinese Commerce Ministry official told Reuters.
"We oppose the over-emphasis on the yuan's exchange rate," the official said, when asked about the bill. "The yuan's exchange rate is not a magic potion for solving global economic imbalances."
The apparent hardening of positions drove the yuan to a three-week low against the dollar in the offshore forwards market, implying just 2.4 percent of appreciation over the next 12 months.
Ding Zhijie, a professor at the University of International Business and Economics in Beijing, said U.S. arm-twisting on the exchange rate was "totally counter-productive."
"With such heavy pressure from the United States, any move would look like giving in to foreign pressure -- for both the Chinese government and the Chinese public, it would be unacceptable," Ding, who provides advice to the government, said.
SHIFTING CIRCUMSTANCES
The World Bank also weighed into the debate, recommending a stronger exchange rate and a tighter monetary policy to restrain inflation expectations and asset bubbles.
The case for greater exchange rate flexibility had, on balance, increased over the last year, Ardo Hansson, the bank's lead economist in Beijing, told a news conference.
"If there is a concern about inflation, if there is a concern about sensitive capital inflows, this is part of the arsenal for dealing with these policy issues," he said.
Beijing's stance had been consistent and was unchanged, the Chinese official said. He cited Premier Wen Jiabao and Commerce Minister Chen Deming, who have said that a stable yuan has contributed to both the Chinese and the global economic recovery.
"We have repeated ourselves multiple times. And we cannot be any clearer," the official said.
FRICTION OVER DEFICIT
China has in effect pegged the yuan near 6.83 to the dollar since mid-2008 to cushion its exporters from the global crisis.
Rising inflation and recovering exports had fueled market expectations that Beijing was on the cusp of resuming the gradual path of appreciation followed for three years starting in mid-2005.
Wen on Sunday recommitted China to pushing ahead with reform of the yuan's exchange rate mechanism, leaving the door open to reintroducing exchange rate flexibility if it suits Beijing.
But the premier also said that the yuan was not undervalued and said calls for appreciation were tantamount to protectionism.
The Commerce Ministry official rejected the argument that China's yawning trade surplus with the United States and broader global economic imbalances were due to the yuan.
"Focusing on the yuan's exchange rate is not an effective way to address trade issues between China and the United States," the official, who spoke on condition of anonymity, said.
DEADLINE LOOMS
The U.S. trade gap with China narrowed to $226.8 billion in 2009 from a record $268.0 billion in 2008.
But with the administration of President Barack Obama keen to expand exports and jobs, the deficit remains a point of friction between the two powers, which have also recently been at odds over human rights, Tibet and U.S. arms sales to Taiwan.
The U.S. Senate bill, a rare show of bipartisan accord, adds to pressure on Obama, whose administration must decide whether to label China as a currency manipulator in a semiannual Treasury Department report due on April 15.
Many U.S. lawmakers, with strong backing from economists, believe the yuan is undervalued by at least 25 percent, giving Chinese companies an unfair edge in trade -- an advantage seen as more critical now that the U.S. economy is struggling to recover from the worst downturn since the 1930s.
But Ding, the Beijing professor, said the United States, not China, would be the loser if the currency spat escalated because of the relative cyclical strength of the two economies.
"If -- and I say only if -- a trade war takes place, it's almost certain that the U.S. economic recovery will halt and there will a double-dip," he said.
Dan Ikenson, a trade policy analyst at the Cato Institute in Washington, said he feared the legislation could inflame relations with Beijing without accomplishing the lawmakers' goal of reducing U.S. imports from China.
He noted that when the yuan rose 21 percent against the dollar between July 2005 and July 2008, the U.S. trade deficit with China actually increased to $268 billion from $202 billion.
(Additional reporting by Zhou Xin and Alan Wheatley; Editing by Alex Richardson)
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