Toughening Its Line, U.S. Warns China on Currency

New York Times :: EDMUND L. ANDREWS: "The Bush administration warned China on Tuesday that its currency policies were distorting world trade, and it brandished the threat of retaliation against the country's exports if Chinese leaders did not change course in the next year. In language far harsher than it has used before, the Treasury Department declared that China's fixed exchange rate between its currency, the yuan, and the dollar posed a risk to its economy and the economies of much of the rest of the world.

The administration stopped short of accusing China of outright currency manipulation, a move demanded by American manufacturers who complain that the Chinese have artificially undervalued their currency to make exports cheaper in the United States.

The administration's combative new stance was not enough to satisfy many members of Congress from both parties, who want to soon threaten China with steep tariffs on its exports if it fails to allow the yuan to rise significantly from a narrow band around 8.28 to the dollar.

A stronger yuan would tend to make Chinese goods more expensive in foreign markets, diminishing the country's competitive advantage. Still, economists said even that was unlikely to make a dent quickly in the huge trade imbalance with the United States.

The studied shift in the administration's stance reflected delicate issues that confront American officials, who want China to change its currency practices but are even more worried about pressure from Congress to restrict trade.

In less than a decade, China has emerged as a manufacturing powerhouse and an indispensable source of low-price goods - toys, furniture and electronics, among others. The expiration on Jan. 1 of global textile quotas has flooded world markets with Chinese apparel.

American manufacturers have been caught on both sides of this transformation in trade: often overwhelmed by Chinese competition yet benefiting as buyers of Chinese goods and investors in factories. Administration officials are also juggling political concerns. As a great power of Asia, China is crucial to Washington's efforts to restrain North Korean nuclear ambitions.

The Chinese Embassy in Washington had no immediate comment. But even before the administration issued its report, Chinese leaders said on Monday that currency policy was a "sovereign" matter and that they would not be pushed into decisions by other governments.

The Treasury warning implicitly gave the Chinese until October, when the administration is required to make its next report to Congress on foreign currency practices. If it declares that a country is manipulating its currency to gain competitive advantage, it is required to begin negotiations over exchange rates that could lead to retaliation.

The United States trade deficit with China reached $124.9 billion last year, larger than that with any other country or with the entire European Union. China has also become one of America's biggest foreign creditors, holding more than $600 billion in Treasury securities and other dollar-denominated instruments as it seeks to keep its currency from rising in line with the trade surpluses. The policy, he said, threatened the Chinese economy by sowing the seeds of inflation, distorting capital flows and preventing the nation's central bank from conducting normal monetary policy.

China has pegged the yuan at a fixed rate to the dollar since 1994, when it was beginning to emerge as a force in global trade. Left to free-market forces, specialists say that the value of the yuan would have climbed substantially against the dollar. But China and other Asian nations have kept the value constant by buying hundreds of billions of dollars in Treasury securities.

The Chinese central bank bought more than $250 billion in dollar-denominated securities over the last year and now holds more than $600 billion, according to recent estimates. Mr. Schumer and Senator Lindsey O. Graham, Republican of South Carolina, stunned administration officials last month by winning bipartisan Senate support for a measure that would threaten China with tariffs up to 27.5 percent if it failed to change its currency policies.

The Senate voted 67 to 33 against killing an amendment that would have attached the provision to a spending bill. Mr. Schumer withdrew the amendment, but Senate Republican s have agreed to allow a vote on the measure before the end of July."