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U.S. Softens Its Warning to Beijing
By EDMUND L. ANDREWS
May 27, 2005
WASHINGTON, May 26 - Even as it publicly presses China to let its currency rise in value, the Bush administration has quietly softened a crucial demand.
In a calculated shift, administration officials have stopped demanding that China let its currency, the yuan, float freely against other major currencies.
Instead, American officials are telling Chinese leaders that they can keep their policy of a fixed exchange rate - at least for now - if they increase the value of the yuan by 10 to 15 percent.
The policy switch reflects a growing realization that Beijing is simply not going to let its currency soar, which would make its exports more expensive and could disrupt China's troubled banking system.
But the switch also highlights the administration's limited leverage over China. Having failed to budge Chinese leaders with polite financial diplomacy, administration officials are struggling to find ways to apply pressure without resorting to import barriers.
"I don't think it is in our interest or in their interest in going immediately to a full float," Treasury Secretary John W. Snow said at a hearing on Thursday at the Senate Banking Committee. "I see them as on a path to a full float."
Mr. Snow refused to say how much he wanted China to revalue the yuan. But people close to the administration said it was privately demanding an immediate increase of 10 to 15 percent. So far, Chinese officials have shown little inclination to go even that far. The People's Bank of China, in an annual report, said this week that it planned to keep its currency stable at a "reasonable and well-balanced level," according to The China Daily.
Antagonism toward China and its trade surplus with the United States, which reached $162 billion last year and is still rising, has intensified in Congress recently.
On Thursday, Republicans and Democrats on the Senate Banking Committee sharply criticized Mr. Snow for being too easy on China.
Senator Paul S. Sarbanes, Democrat of Maryland, warned Mr. Snow that Chinese officials appeared to be suggesting a very small revaluation of 3 to 5 percent - "preposterous figures," Mr. Sarbanes said.
Senator Elizabeth Dole, Republican of North Carolina, told Mr. Snow she was "frankly astounded" that the Treasury Department declined to accuse China of currency manipulation in its report last week on foreign exchange practices.
Senator Richard C. Shelby, Republican of Alabama and chairman of the banking committee, said the Treasury Department had "punted" on the issue by saying that China's foreign exchange policies did not meet the "technical" definition of currency manipulation.
China has kept the value of the yuan at a fixed exchange rate of 8.3 to the dollar for more than 10 years, despite a soaring trade surplus with the United States that would normally lift the value of its currency.
Many analysts estimate that the yuan is undervalued by more than 25 percent, which makes Chinese exports to the United States cheaper than they would be otherwise.
To keep the yuan from rising in value, the Chinese government has bought large volumes of Treasury bonds and other dollar-denominated securities. Last year, it added $215 billion to its foreign reserves, which reached $647 billion, according to the International Monetary Fund.
For two years, Mr. Snow and his deputies have been trying without success to persuade China to adopt flexible exchange rates. Though they have hedged their demands in public, administration officials have urged Chinese officials in private to let their currency float freely.
Some experts have argued that Mr. Snow's seemingly tough stance was a mistake, because it was hopelessly unrealistic and might cause financial shocks to the Chinese banking system.
"This is not an administration that is comfortable relying on market signals," said Morris Goldstein, a senior economist at the Institute for International Economics in Washington, referring to the Chinese government.
Even if China did announce a floating exchange rate, he added, it would continue to intervene heavily in currency markets to keep the yuan from rising too much. By contrast, he said, a big upward revaluation would be a "large down payment" that moved China's currency closer to what it would be in a free market.
Mr. Snow adopted a new position last week, when he said it had been a "misconception" that the United States was calling on China to adopt floating exchange rates immediately.
"What we are calling for is an intermediate step that reflects underlying market conditions and allows for a smooth transition - when appropriate - to a full float," Mr. Snow said on May 17.
That was the first time Mr. Snow had publicly mentioned the possibility of "intermediate" steps and the first time he had explicitly denied that the United States was demanding a floating exchange rate for China.
Tony Fratto, a spokesman for Mr. Snow, said the softer line was a mere refinement. "We've been pretty disciplined and precise in talking about flexibility," Mr. Fratto said. "We've almost never talked about a float."
But industry lobbyists and policy experts said the shift was significant.
"They've come around to where we've been all along," said Frank Vargo, vice president for international economics at the National Association of Manufacturers, which has been demanding that China revalue its currency for years.
But Senator Charles E. Schumer, Democrat of New York and a critic of the administration's dealings with China, said Mr. Snow should push for more. "China has to let their currency float," he said. "The administration has now stepped into the batter's box. Now you need to swing at the pitch."
http://www.nytimes.com/2005/05/27/business/worldbusiness/27yuan.html
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