U.S. China Currency Dispute Heating Up

The heated debate between China and the United States over the value of its currency intensified yesterday (Thursday) when a senior Chinese trade official warned that further appreciation of the yuan could put many of its exporters out of business - something China can't afford.

Those remarks came shortly after a key International Monetary Fund (IMF) official flatly stated that the currency is severely undervalued.

China's Vice Commerce Minister Zhong Shan told The Wall Street Journal in an exclusive interview that the profit margins on many Chinese export goods were less than 2% and any further increase in the currency's value would endanger more exporters' survival.

Zhong emphasized that if the yuan were allowed to appreciate by even a small amount, it would likely push many of its exporters over the brink.

"Water doesn't boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree," he told The Journal. Likewise, "a further rise in the yuan by a very small magnitude might cause fundamental changes" to exporters in China.

Zhong's remarks underscore the domestic political pressures on Beijing amid growing international calls for China to let the yuan rise.

The yuan rose 21% against the dollar between July 2005 and July 2008, when China adopted a managed-float currency system under which the yuan's value was linked to a basket of currencies. But the yuan has been kept almost unchanged against the dollar since the outbreak of the global crisis to help Chinese exporters.  

Western countries, and even China's Asian neighbors, insist that China's currency policy has left the yuan seriously undervalued and creates an unfair advantage in trade at a time when many other economies are struggling.

The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports to the European Union, the Red Dragon's biggest market.

After China's Premier Wen Jiabao rejected calls to let the yuan appreciate in a news conference on Sunday, a bipartisan group of U.S. senators introduced legislation aimed at forcing the Obama administration to take action against China over its currency policy, reflecting growing anger on Capitol Hill over the issue.

U.S. President Barack Obama said last week that he wanted to double U.S. exports over the next five years and challenged China to adopt a "market-oriented exchange rate" for its currency. China posted a $198 billion trade surplus with the rest of the world last year, with exports to the U.S. outpacing imports by more than 4 to 1.

IMF Managing Director Dominique Strauss-Kahn joined the chorus Wednesday when he said that China's currency remains undervalued.

"Some currencies are obviously undervalued, especially in Asia, especially the renminbi," he said at a conference at the European Parliament, using the Chinese currency's official name.  He called for China to increase domestic consumption.

Zhong emphasized the Chinese are open-minded on currency policy, but don't respond well to outside pressure.

"We are willing to have discussions with the U.S. on the currency issue. There's nothing that can't be discussed between China and the U.S. But if you pressure us to do something, that's not in line with China's culture." Mr. Zhong said.

He also said China is willing to purchase more American goods and take other steps to reduce its trade surplus with the United States.

Zhong is scheduled to arrive in the United States this weekend for a series of meetings with U.S. representatives, including congressmen, to seek ways to improve the bilateral trade relationship amid rising political and economic tensions.

The currency tiff is at least partially responsible for a series of U.S. trade sanctions against Chinese goods that began in September when Obama imposed additional duties on imports of Chinese tires.  Since then Beijing and Washington have traded shots over exports of tires, chickens, steel, nylon, autos, paper and salt.

The spat is likely to get even messier in April, when the U.S. Treasury Department will be required by law to declare whether China manipulates its currency.  As November's elections approach, Americans are livid over the lack of job growth, and China is an obvious place for congressional finger-pointing. 

The trade tensions are in addition to other problems complicating U.S.-Sino relations.

Diplomatic relations took a dark turn recently when the U.S. government sold roughly $6.4 billion in weapons to Taiwan - the self-ruled island that China considers part of its territory.  Shortly after that, President Obama ratcheted things up further by meeting with the Dalai Lama at the White House.

Both moves infuriated China.

"These moves have violated China's territorial integrity," Wen said Sunday. "The responsibility does not lie with the Chinese side but with the United States."

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