US Weighs Harder Line with China on Yuan

Frustrated by the slow pace of China's appreciation of its currency, the Bush administration is sending signals that it is ready to take a harder line with Beijing.

The shift comes as U.S. data show its trade deficit with China ballooned last year to $202 billion, more than one-quarter of the total U.S. deficit. That has added to political pressure on the administration from members of Congress, who say American jobs are being lost to the tide of inexpensive Chinese imports and the flight of manufacturing to China.

Last week, U.S. Trade Representative Rob Portman announced a task force to take up complaints about unfair Chinese trade practices. U.S. politicians allege that China deliberately keeps its currency weak to make its exports cheaper in dollar terms and U.S. imports more expensive.

Now, the U.S. Treasury, which has so far sought to avoid confrontation with Beijing over the currency issue, is preparing the ground for a possible decision to label China a "currency manipulator," in a regular review scheduled for April, although the semiannual report often is issued well after the scheduled release date. The Treasury has been sounding out Wall Street investors about such a move, which would require the U.S. to open formal talks with China on the issue.

All this comes ahead of a visit to the U.S. in April by Chinese President Hu Jintao. The visit gives the Bush administration some leverage to extract concessions from Beijing, which will be anxious for Mr. Hu's trip to go as smoothly as possible.

In testimony to the U.S. Congress last week, new Federal Reserve Chairman Ben Bernanke sought to play down what many consider a grave risk in any trade confrontation with Beijing – that China may decide to sell its huge holdings of U.S. Treasury bills. That could force up U.S. interest rates and add to the cost of borrowing by consumers and businesses. He said U.S. capital markets are "sufficiently large and liquid that the impact of such changes would be mostly transitory and could be managed."

But Mr. Bernanke advised caution when asked about pending legislation that would impose a 27.5% across-the-board tariff on Chinese imports if Beijing fails to do more to strengthen its currency. "It's not a good idea to break down some of the gains we've made in terms of freeing trade in the world economy," he said.

Also, Mr. Bernanke made clear he saw no quick fix to the U.S. deficits, saying it could take a decade to shrink them to more sustainable levels.

U.S. Treasury officials had hoped to avoid a battle with Beijing, believing that the threat of a protectionist backlash in Congress might be enough to persuade Beijing to pick up the pace of currency appreciation. They showed sympathy with Beijing's arguments that it needed time to put in place more sophisticated trading systems and to expand domestic consumption to wean the economy off exports.

However, the Treasury has little to show for its patience. After a 2.1% appreciation of the yuan against the U.S. dollar in July last year, China's currency has since strengthened by less than 1%. It closed Friday at 8.048 against the dollar.

But as the Bush administration struggles to fend off protectionist legislation, it has to weigh any aggressive action against Beijing carefully, and it is far from clear that the U.S. Treasury will raise the stakes by labeling China a currency manipulator.

The Treasury, as evidenced by recent decisions to avoid citing China for manipulating its currency, has substantial leeway in what to say in its next report, and the decision is largely one of tactics and political judgment. A determination that China is manipulating its currency doesn't have any immediate tangible effect, but is supposed to trigger talks between Washington and Beijing -- and such talks have been underway for sometime, anyway. It is too early to tell whether the talk of citing China in the next round is jawboning to put pressure on Chinese leaders before Mr. Hu's visit in April and to calm China-fearing members of the U.S. Congress or a sign of Bush administration frustration with China.

Wall Street represents a spectrum of opinion on the currency issue. Retailers like Wal-Mart Stores Inc. would face severe disruption if a trade war cut off supplies of Chinese products that fill its shelves. Trade friction also could rebound on many U.S. multinationals, which see the huge Chinese market as among their most attractive investment opportunities.

Nor is it obvious that forcing China to appreciate its currency would result in the return of U.S. manufacturing jobs from a country where factory hands often work six days a week in return for less than $100 a month and a dormitory bed.

Many economists say that if Congress choked off imports from China, low-end manufacturing would simply migrate to countries like Mexico or Vietnam, and the net effect on the U.S. deficit would be insignificant.

Still, currency appreciation fits in with China's strategic goal of making its economy less dependent on exports. So while Chinese leaders remain adamant they will move on the currency at their own pace, they have laid the groundwork for a possible change of tempo.

Mr. Bernanke offered few alternatives for prodding China to change, other than persuasion and technical assistance.

Also last week, U.S. Treasury Secretary John Snow said the U.S. isn't satisfied with the progress China made after the initial revaluation last year. "It's time for more movement," he told Bloomberg television. "We will hold them to their commitments."