U.S. holds tongue on yuan

Critics react angrily to Treasury report on Chinese policy


WASHINGTON -- Six months ago, the Bush administration warned that it would accuse China of currency manipulation if it failed to make substantial changes to its fixed peg between the yuan and the dollar.

In July, China allowed the yuan to rise by 2 percent, the first change in more than 10 years, but it has not budged since.

The Treasury Department once again held its tongue yesterday. Instead of accusing China of currency manipulation, it expressed disappointment that trading in the yuan is "highly constricted" and said it would "intensely scrutinize" its practices in future reports.

The statement was included in a report issued by the department every six months on the currency policies of the nation's trading partners.

It provoked an angry reaction from U.S. manufacturers, some lawmakers and outside trade analysts who have argued for years that China has deliberately undervalued its currency to make its exports cheaper in world markets.

"We've seen this movie before," said Frank Vargo, senior vice president for international affairs at the National Association of Manufacturers. "What Treasury is saying is pretty much of a rerun of what it said back in May."

In Congress, two leading critics of China quietly renewed threats to seek legislation that would impose steep tariffs on Chinese imports if the yuan was not allowed to float more freely.

"The Chinese manipulate their currency, and the administration should not have ducked the issue," said one, Sen. Charles E. Schumer, the New York Democrat. "Their refusal to acknowledge reality and take the necessary corrective actions hurts every American."

Schumer and Sen. Lindsey Graham, a South Carolina Republican, are co-sponsors of a bill that would impose steep tariffs on Chinese imports.

This month, the two lawmakers agreed to defer a vote on their bill but left open the option of demanding a vote as early as December.

China's trade surplus with the United States has continued to balloon in 2005 and is expected to approach a record $200 billion, bigger than the U.S. trade imbalance with any other nation, including Japan and the entire European Union.

The trade imbalance is all but certain to widen even more next year. China's exports to the United States are six times its imports, meaning that U.S. exports to China would have to climb six times as fast as imports just to keep the trade balance at current levels.

Buying U.S. debt

To keep its currency from rising in value, China's central bank continues to buy U.S. debt and has acquired hundreds of billions of dollars in Treasury securities.

"It's a big mistake not to label China if the U.S. law has any meaning," said C. Fred Bergsten, director of the Institute for International Economics, a research group in Washington. "They are still intervening massively to keep their currency from rising. I don't see how you can not define that as manipulation."

Most analysts agree that the yuan is undervalued and would rise if China allowed it to float more freely. That makes Chinese exports cheaper for people paying in dollars, though it is far from clear that a higher value for the yuan would offset China's huge cost advantage in cheap labor.

Treasury Secretary John W. Snow has spent the past two years trying to persuade China that flexible exchange rates are in its own interest.

Branding China a "currency manipulator" would be largely symbolic, but it would be the first time in 11 years that the United States has made such a charge and would represent a much more confrontational approach.

Greater pressure on China could come from Congress. In a vote that stunned the White House as well as Chinese officials, the Senate voted 67-33 against squelching a floor vote on the Schumer-Graham bill. That bill would impose tariffs of 27.5 percent on Chinese goods if Beijing failed to let its exchange rate reflect market forces.

Vote is promised

To postpone an immediate vote last spring, Senate Republican leaders promised Schumer and Graham a chance to bring their measure up later this year. Schumer said he had not decided whether to seek a vote as early as December, but an aide said that "everything is on the table."

Administration officials flatly oppose such legislation, saying it would jeopardize trade and hurt consumers. Instead, they once again stressed their desire to let Chinese leaders make good on their repeated vow of moving toward a floating exchange rate.

"We're going to give them the benefit of the doubt that they will do what they say they are going to do," said Timothy D. Adams, undersecretary of the Treasury for international affairs. "We would just urge them to undertake a quicker pace of reform."

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