Today marks the two-month anniversary of a "watershed" event that was "hotly anticipated," "potentially far-reaching" and "extremely positive."
Those are some of the phrases that analysts, U.S. officials and the media used to describe China's announcement on July 21 that it was de-linking its currency, the yuan, from the U.S. dollar, after keeping it pegged at 8.28 yuan per dollar for years. The move aroused hope that by allowing the yuan to rise in greater accord with market forces, Beijing was ending a cheap-currency policy viewed by many critics as giving its industries an unfair competitive edge against foreign firms.
But the Chinese currency has barely budged beyond the initial rise of about 2 percent, specified in Beijing's announcement, and was valued at 8.089 per dollar yesterday. The lack of movement is prompting worries that Sino-American trade tensions could turn uglier than ever, as early as this fall. The issue looms as a major topic at international finance meetings in Washington this weekend, where China's top economic policymakers will meet their counterparts from the Group of Seven industrial nations.
"People feel betrayed" by the yuan's minimal gain, said C. Fred Bergsten, director of the Institute for International Economics. The upshot, he warns, could be "a clash of the titans," a scenario in which two of the world's biggest economies engage in tit-for-tat retaliation against each other's goods, endangering the stability of global trade and financial markets.
With the yuan still valued at what he considers too low, Sen. Charles E. Schumer (D-N.Y.) is renewing threats to push through legislation, which he co-sponsored with Sen. Lindsey O. Graham (R-S.C.), that would slap 27.5 percent tariffs on Chinese goods unless Beijing lifts the yuan's value. The bill won the support of two-thirds of the Senate in a procedural vote this year, and in an interview Schumer vowed: "If nothing has changed, we will move our legislation by the end of the session -- before Thanksgiving."
Chinese spines are stiffening in response. Zhou Xiaochuan, China's central bank chief, singled out Schumer and Graham's bill during a Sept. 9 meeting in Canada: "Such 'noises' will not change any of the basic conditions and sequences of China's exchange rate reform" but only disturb progress, he said.
Arcane as currency debates may appear, people throughout America's manufacturing heartland are exercised in China's policy, and they have demanded action from Capitol Hill. The National Association of Manufacturers has taken a leading role, complaining that U.S. makers of auto parts, furniture and other goods have a harder time competing with Chinese imports when those imports get the added price advantage of a cheap yuan. By some economists' estimates, the yuan's exchange rate is about 15 to 25 percent below where it would be if it were entirely determined by market forces.
China's July 21 announcement looked as if it might dispel the anger. Although critics weren't impressed with the initial 2.1 percent revaluation of the yuan to 8.11 per dollar, much excitement surrounded the Chinese pledge to link the yuan to a group of major currencies against which the yuan could rise or fall up to 0.3 percent each day. That system could translate into a major upward revaluation if the yuan rose by the 0.3 percent daily limit for a few weeks.
But there was plenty of reason to suspect that the move might prove very slow to change the yuan's value. The Chinese central bank, with its massive reserves of dollars, could easily keep the yuan from rising rapidly, especially in a financial system that is relatively walled off from inflows and outflows of foreign money.
Since then, events have bolstered such skepticism. A "solemn statement" issued by China's central bank on July 26 asserted that "certain foreign media has misled the public and even wrongly speculated" that the 2.1 percent revaluation was the first in a series of adjustments.
The situation presents a thorny choice for the Bush administration. The U.S. Treasury must decide whether to cite China for running a "manipulative" currency policy when it issues a semi-annual report on currency markets, probably in late October or early November.
A finding of manipulation, which the Treasury has so far refrained from issuing, might pacify the congressional hawks such as Schumer -- but also might incite even tougher legislation. And it would launch a process, some hawks hope, in which the United States would press the International Monetary Fund to issue a similar finding against China and eventually seek a ruling by the World Trade Organization authorizing Washington to impose punitive duties on Chinese goods.
Keenly aware that open threats tend to be counterproductive with Beijing, administration officials are applying pressure as diplomatically as possible for further rises in the yuan.
"We're still in the very early stages of what is, for them, a new regime," said Timothy D. Adams, undersecretary of the Treasury for international affairs. "And thus far, I think we -- the United States, the G-7 and other institutions -- have been both supportive and patient. But we have expectations that greater flexibility will occur over time."
But speaking on condition of anonymity, U.S. officials acknowledge concern. "I suspect that patience has a short shelf life," said one top policymaker, "and there is a mismatch between what the Chinese are probably thinking and what this town is probably demanding."
Perhaps, the Chinese will allow the yuan-dollar exchange rate to move just below 8.0 in coming weeks, on the theory that that will mollify Washington, speculated Matthew P. Goodman, a vice president at Stonebridge International LLC who advises multinational corporations. It wouldn't be a huge shift, he noted, but "7.999 looks better than 8.001."