Treasury Resists Calling China a Manipulator
Thursday, May 11, 2006
Once again, the Bush administration is refraining from branding China a "currency manipulator," even while expressing displeasure with Beijing for keeping a currency system that critics call unfair.
The administration's position was disclosed yesterday in the latest semiannual report by the Treasury Department to Congress on currency matters. The report strongly suggested that the administration is sticking to its strategy of avoiding harsh confrontation with China on the issue, in the hope that Chinese leaders will be more likely to change policy in the absence of overt threats.
"We are extremely dissatisfied with the slow and disappointing pace" of movement in the Chinese yuan, Treasury Secretary John W. Snow said in a statement yesterday. U.S. manufacturers, labor unions and many politicians contend that China's policy of keeping its currency weak gives its exporters an edge and costs American jobs.
But as with previous reports, the Treasury Department declined to find China guilty of manipulation. Under a 1988 law, such a finding would have required the administration to initiate consultations with Beijing. Although that would have limited practical effect by itself, administration officials fear it would risk escalating transpacific tensions and emboldening members of Congress to push for tough sanctions against Chinese imports.
The Treasury, Snow said, "is unable to conclude that China's intent has been to manage its exchange rate regime for the purposes . . . of gaining unfair competitive advantage in international trade" or running a trade surplus. He cited several steps China has taken to make its monetary system more market-oriented, as well as public assurances by President Hu Jintao that Beijing has no intention of running a big overall trade surplus.
The administration's reluctance to accuse China of manipulation has long frustrated Beijing's U.S. critics, who contend that Treasury is turning a blind eye to the problem. Although China revalued the yuan by about 2.1 percent in July 2005 and abandoned its decade-old policy of keeping the yuan rigidly pegged to the dollar, Chinese authorities have used their tight controls over capital flows to keep the yuan's appreciation since then to about 1 percent. Some economists estimate that against the dollar the yuan is as much as 40 percent below where it would trade if supply and demand prevailed.
"Today the administration chose to plant its head in the sand," said Rep. Phil English (R-Pa.) in a statement.
But yesterday's report was the latest sign that Washington -- administration officials and some influential lawmakers alike -- has concluded that China will probably be more forthcoming if it can be seen to be acting on its own.
In late March, Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.), leaders of the congressional attack on China's currency policy, eased the pressure they had been applying on Beijing. Upon returning from a trip to China, they cited signs that Beijing recognizes the need to let the yuan appreciate and announced that they would postpone for six months a vote on their bill, which would impose substantial tariffs on Chinese goods if Beijing continues to restrain the yuan's rise against the dollar.
Yesterday, the pair denounced the Treasury Department's stance. "The administration has now made it a habit of walking up to the line and not crossing it, even in the face of overwhelming evidence," Schumer said. But he added that he was still willing to delay action on the bill, until at least Sept. 30. "We're willing to give them a chance," he said.
At a news conference, Snow maintained that the Treasury Department's conclusion was mandated by a strict reading of how the law defines currency manipulation. "Remember, the test in the 1988 act ultimately comes down to intent," he said, and "China has indicated an intent" to make its currency system more flexible, open its markets and shrink its trade surpluses.
Pressed on what the administration would do if China still fails to change its policy in the future, when other reports are due, he acknowledged, "At some point we could have a different outcome." But as in the past, he declined to say how much the yuan must rise to satisfy Washington. "We don't have a specific target in mind," he said.
Speaking to reporters afterward on condition of anonymity, a senior Treasury official said the department had honestly based its conclusion on the law but acknowledged that tactical considerations had been taken into account. "We've got to keep our eyes on the prize," he said. "Sometimes you've got to push, sometimes you've got to pull, sometimes you use diplomacy, and sometimes other means."