There has been tremendous pressure on the US Adminisration totake some effective measures to counter the willful and deliberateunder-valuation of Yuan. This has been conveyed to the US President in as many words, as were deemed adequate as the Senate Finance Committee membershad taken this matter with the US President in a recent hearing. Thishas even led to increasing rumours that the Treasury Department could citemainland China as a currency manipulator in its April semiannual report toCongress on foreign currency practices, especially if the Yuan does notappreciate substantially from mid-February through the end of March.

While rumours on such a designation haveabounded ever since China implemented a managed float regime for the Yuan inJuly 2005, they never materialised primarily because the Chinese currency wasallowed to appreciate moderately against the US dollar during 2005-2008. Thisappreciation was particularly significant during the year-ending July 2008 asthe value of the greenback fell 9.7 percent from an average value of 7.78 Yuanin August 2007 to an average value of 7.21 Yuan in July 2008. However, theYuan's value has barely budged since July 2008 and both Congress and the Obamaadministration believe that the Chinese currency is still significantlyundervalued with respect to the dollar.


It has been noted that lawmakers from all pointsof the political spectrum are clearly growing restless with China's refusal to let its currency appreciate and are calling on the administration totake more vigorous action. For example, Senate Finance Committee Member CharlesGrassley (Iowa) advised the President on 3 February to change course on thecurrency issue and label China a currency manipulator. Grassley said he gavethe Administration's diplomatic efforts "the benefit of the doubt"but now believes that bilateral mechanisms such as the Strategic and EconomicDialogue have not produced any results so far in this particular area. Sen. BenCardin has urged Treasury Secretary Timothy Geithner to be more aggressive onthe currency issue at a 4 February hearing on the President's Budget for fiscalyear 2011. Geithner responded that it is "quite likely" that China will let its currency appreciate and vowed to "work very hard" to encouragethis.


As a matter of fact, President Obama didacknowledge in early February that one of the main challenges the United Stateswill have to face in the years to come is ensuring that currency rates are properly aligned so that US goods are not "artificially inflated in price" whileforeign goods are "artificially deflated in price." At the same time,Obama stressed that the future of the US economy is tied to its ability to sell products in Asia in general and mainland China in particular and that it wouldbe a mistake to "close ourselves off from that market." Obama hassaid in no uncertain terms that he is "not in favour of revoking the traderelationship that we've established with China." Obama has generallyfavoured a co-operative approach toward Beijing but the currency issue remainsa nagging thorn in the side of Sino-US relations and could become a source oftension this year.


Any decision by Treasury to name China acurrency manipulator would require the Obama administration to initiateconsultations on an expedited basis with Chinese authorities in theInternational Monetary Fund or bi-Iaterally to ensure that China adjusts itsexchange rate "regularly and promptly" in order to "permiteffective balance of payments adjustments and to eliminate the unfairadvantage." Such a decision would have a considerable political impact andcould mark a turning point in US-China economic relations. While Treasury wouldnot be able to punish China if it decides to keep its currency undervalued, theAdministration could address the issue within the framework of countervailingduty investigations of Chinese products, which could lead to significantlyhigher CV duties.



Image Courtesy:


open.salon.com/blog/lea_lane/recent/page/5



Originally published in The Stitch Times: April 2010