Battle Rises Over China

Treasury's Silence on Yuan Provokes Senate Bill

After months of insisting that China allow the market to set the value of its currency or risk damaging the world economy, the Bush administration yesterday declined to brand China a currency manipulator.

The decision by the Treasury Department to spare Beijing an official rebuke in a semiannual review of foreign currencies unleashed a fresh chorus of demands on Capitol Hill for trade action against China.

Four Republican and Democratic senators yesterday introduced legislation designed to pressure the administration to take a stronger line. Their bill would direct the Treasury to consult with the Federal Reserve and foreign central banks about intervening in currency markets to cancel out the effects of manipulation by China or other countries.

"The inaction of China over the last two years has disappointed us and disappointed us and disappointed us," Sen. Charles E. Schumer (D-N.Y.) said at a news conference. "The administration has been too slow in my judgment to act against Chinese unfair trade practices."

Analysts said the bill has little chance of passage, and the Treasury continued to endorse talks, not legislation, as the best way to manage tensions with China. But the prospect of punitive action by Congress still drew an angry reaction from across the Pacific.

"The Chinese side has already made many concessions," said Song Hong, director of the Institute of World Economics and Politics at the government-affiliated Chinese Academy of Social Sciences in Beijing. Further pressure from Washington, he said, would create "an attitude of growing non-cooperation, and the currently already fragile negotiating relationship will be destroyed."

The issue of China's currency, the yuan, has in recent years emerged as a central irritant in its complex trade relationship with the United States. Manufacturing groups in the United States claim that China keeps the value of the yuan artificially low, making its goods unfairly cheap on world markets and thereby stealing American jobs.

Such claims have grown strident with the expansion of the U.S. trade deficit with China -- $233 billion at the end of last year, by U.S. estimates -- and as China's foreign exchange reserves have swelled to more than $1 trillion.

China counters that it has been cast in Washington as the scapegoat for the decline of American manufacturing jobs, while arguing that consumers worldwide benefit from low-cost Chinese goods.

China has long said it eventually plans to allow the yuan to float freely, but it insists the move must be gradual, to allow Chinese banks and exporters to gain expertise in managing the risks of currency fluctuation. China's leaders face intense pressure to support export industries, whose factories are a crucial source of jobs for millions of peasants streaming to the cities.

Two years ago, after American complaints, China increased the value of the yuan by about 2 percent. Since then, the yuan has increased by 6 percent. American trade groups say the yuan remains undervalued by as much as 40 percent.

In recent years, a parade of Bush administration envoys have traveled to China with demands for swifter movement, only to be rebuffed. When Henry M. Paulson Jr. became Treasury secretary last year, he raised expectations of greater headway. Paulson had traveled to China frequently as chairman of Goldman Sachs, gaining familiarity with top officials.