China made its debut last night in the club of the world's leading economic powers, as international pressure mounts to change a decade-old currency peg that critics accuse of giving Chinese products an unfair competitive edge.
Yesterday's dinner meeting was the first at which top Chinese economic officials participated in a gathering of the Group of Seven major industrial nations. The heightened level of engagement with Beijing is aimed at easing tensions concerning the Asian giant's integration into the global economy.
Hours before China's top economic policymakers sat down with their G-7 counterparts, they addressed the currency issue by pledging to "push ahead firmly and steadily" toward a flexible exchange rate for the yuan, which has been fixed at about 8.3 per dollar since 1995.
But the statement, issued after a meeting with U.S. officials, contained no timetable for allowing the yuan to float. Chinese officials have issued similar declarations in the past, but they have held the yuan's exchange rate constant, triggering increasing complaints from economists, business groups, labor unions and politicians that the yuan is too cheap and thus poses a serious problem for companies facing Chinese competition.
"What they don't want to talk about is the 'W' word -- when?" said Morris Goldstein, of the Institute for International Economics. "Here we have one of the world's most important currencies, significantly undervalued, and it makes a difference whether they're going to move the rate next week, next year, five years, 10 years. On that, we haven't gotten anywhere, so in that sense, it's business as usual."
After the G-7 meeting, Treasury Secretary John W. Snow defended the Bush administration's approach to the issue, which involves coaxing the Chinese to change their currency policy rather than bullying them. He cited steps China has taken toward creating the conditions for a flexible yuan, such as loosening restrictions on money flowing in and out of the country. But he conceded that he could not offer a timetable.
"I'm not going to put a clock on it, but 'as soon as possible' is what we're looking for," Snow said at a news conference. "We're not satisfied, but I do think we have to note that some real progress is being made." He expressed satisfaction with the discussions, praising the "richness of the dialogue" and "the detailed rendering" by the Chinese "of the actions they're taking to prepare the way for flexibility."
The lack of action drew a fresh denunciation from Democrats who said it shows a disregard for U.S. workers.
"Today, the administration and China have once again failed to address in a meaningful way this issue that is so vital to American businesses, workers and farmers," said a letter by Sen. Charles E. Schumer (D-N.Y.) and Rep. Sander M. Levin (D-Mich.) to Snow and U.S. Trade Representative Robert B. Zoellick.
Schumer, Levin and several other lawmakers filed a petition this week exhorting the administration to bring a complaint against China's currency policy at the World Trade Organization -- a case administration officials have said Washington would probably lose.
The currency issue, to be sure, was just one of many reasons for bringing Jin Renqing, the Chinese finance minister, and Zhou Xiaochuan, governor of the People's Bank of China, together with Snow, Federal Reserve Board Chairman Alan Greenspan and their G-7 counterparts from Britain, Japan, Germany, France, Italy and Canada. A Treasury official said China would be invited to future meetings, though not yet as a full member of the group.
By many measures, China, still governed by the Communist Party, stands as an oddfellow in a group of developed democracies. Half of its 1.3 billion people depend on agriculture for a living, and its gross domestic product per capita is only slightly above El Salvador's. But it now ranks as the world's seventh-largest economy, and its rapid industrialization has been felt worldwide in rising commodity prices and the loss of manufacturing jobs.
"For these meetings to regain any relevance, they need to bring in China -- the single most important engine of growth and agent for change in the global economy," Donald H. Straszheim, an economist at an advisory firm bearing his name, wrote to clients yesterday. "Every major company in the world, wherever headquartered, now sees China either as a threat, an opportunity or both."
But the urgency of the currency issue has put it at the top of the agenda for now. At stake is more than just the problem of cut-rate Chinese goods flooding into the U.S. market.
Many analysts think that because China's exchange rate is much lower than it would be if market forces prevailed -- estimates of the undervaluation range from 15 percent to 40 percent -- other Asian countries, notably Japan, South Korea, and Taiwan, have kept their currencies artificially low as well. This keeps their exports cheap, which has added to the woes of U.S. manufacturers and contributed to a record U.S. trade deficit. The deficit, at more than $500 billion a year, is itself a potential source of global financial instability.
The lack of a breakthrough statement by the Chinese at yesterday's meeting should not be taken as a sign that such gatherings are useless, according to Straszheim. "No one wants to look like a meeting with the big boys resulted in an arm-twisted concession," he said.
But a number of economists, including Goldstein, argue that the administration's approach is flawed. China should be pressed hard to simply raise the value of the yuan by 15 percent to 25 percent, they contend, rather than move soon toward floating the currency. Indeed, a floating currency would be dangerous for the Chinese economy if it were adopted too soon, according to these economists. That is because such a step involves easing the restrictions on the movement of money across the nation's borders, which in turn raises the risk of a financial crisis like the ones that swept through Asia in the late 1990s.
One important lever that has gone unused in prodding the Chinese is the International Monetary Fund, according to Goldstein, who used to be a high-ranking staff economist there. IMF officials have long urged China in public statements to move toward flexibility, the latest example coming this week when the fund's managing director, Rodrigo de Rato, said, "We think that precisely because it's a moment of strong growth in the Chinese economy, that this is a very good moment to do it."
Goldstein contended that the IMF should go beyond rhetoric and use its "special consultation" mechanism, which is intended for countries that are manipulating their currencies for commercial gain. Although special consultations cannot force countries to change their policies, it escalates the pressure on them to act. "But this is obviously something they [the IMF and its major shareholders, including the United States] don't want to do,' Goldstein said.