The Bush administration yesterday opened a new front in its campaign to pressure China to raise the value of its currency, demanding that the International Monetary Fund crack down on countries that engage in currency manipulation.
The demand came in a speech by Timothy D. Adams, the Treasury undersecretary for international affairs, who used blistering language in criticizing the IMF for a number of shortcomings. Most significant was Adams's allegation that the IMF has failed to enforce its own rules that bar member nations from maintaining artificially cheap currencies.
The IMF "needs to be far more ambitious" in policing currency policies, Adams said. "The perception that the IMF is asleep at the wheel on its most fundamental responsibility -- exchange rate surveillance -- is unhealthy for the institution, and it must change," he said.
The speech did not mention China explicitly, but its primary aim was clearly to muster new force behind calls for Beijing to raise the value of the yuan.
China's critics contend that the yuan's exchange rate of slightly more than 8 yuan per dollar -- where Beijing has held it for much of the past decade -- is far out of line with market forces and gives Chinese manufacturers a big advantage against foreign firms, adding to the enormous U.S. trade deficit and China's burgeoning trade surplus. The complaints have come from U.S. politicians, industrialists, labor unions and economists, some of whom have urged that the powers of both the IMF and the World Trade Organization should be used to induce a change in China's policy.
Although China changed its currency system two months ago by unlinking the yuan from the dollar, the yuan since has barely budged beyond an initial 2 percent revaluation against the U.S. currency. Beijing announced another change in the currency system yesterday, stating that the yuan would be allowed to fluctuate more widely against currencies other than the dollar, but that appeared to be a technical rather than fundamental shift in policy, U.S. officials and currency experts said.
The attack on the IMF's policies by a top official of the U.S. government -- the fund's largest and most influential shareholder -- was a jolting start to this weekend's annual meetings of the IMF and World Bank. It suggested that Adams, who took over Aug. 2 as the administration's point man on international finance issues, will pursue a more aggressive approach than his low-key predecessor, John B. Taylor.
Adding to the spectacle, many of Adams's arguments were rebutted about an hour later by Rodrigo de Rato, the IMF's managing director, who said proposals for the fund to be more aggressive on the currency issue were "unrealistic." Both men spoke at a conference organized by the Institute for International Economics, a think tank.
Adams was particularly blunt in assessing the IMF's role in sub-Saharan Africa and other impoverished regions. "It is clear that the IMF's financial involvement in low-income countries has gone terribly awry," he said. Noting that "the IMF is not a development institution" like the World Bank, Adams argued that the fund had made too many loans to poor nations and that such efforts had failed to improve their economies. The IMF, he said, should stick to providing short-term loans when countries urgently need them "in response to an actual balance-of-payments need," such as a financial crisis.
Rato retorted that although some critics believe the IMF should stop helping low-income countries, "the overwhelming majority" of the fund's member nations "is opposed to this position."
The two men were more in agreement on the need to change how the IMF is governed, a particular grievance in Asia. The voting power that Asian countries hold on the IMF's board has remained relatively low despite the region's spectacular economic growth and expanding clout in the global economy. Countries such as Mexico and Turkey are also "underweight" in their voting power. European countries, in contrast, have voting power substantially greater than their relative economic importance.
Adams said that the United States' voting power, which is about 17 percent, should not be changed even though it is much lower than the U.S. share of world economic output. But European board seats and voting shares, he said, should be "consolidated." Rato made a similar case in a "strategic review" he released Monday.
The proposal to make the IMF more confrontational on currency matters comes as fear is mounting that the dispute over the yuan could eventually lead to a U.S.-China trade war. Members of Congress have renewed threats that if China doesn't allow the value of its currency to rise, they will push through legislation as soon as November that would punish Beijing; one Senate bill would impose across-the-board tariffs of 27.5 percent on Chinese goods.
The Bush administration is evidently hoping that enlisting the IMF's help would be a better way of bringing the Chinese around that would involve less risk of tit-for-tat retaliation, some economists said at yesterday's conference. Under the IMF's charter, member countries are free to let their currencies fluctuate or set them at pegged values, but the fund is authorized to initiate "special consultations" with a country whose currency policies appear aimed at giving it a competitive advantage at the expense of others. Adams complained that the power has rarely been invoked.
Although IMF special consultations could not, by themselves, force China to change its policies, they might help exert pressure. And they could be cited as evidence in a case against China at the WTO, which has the power to authorize sanctions against countries.
It is far from clear that other IMF members will back the U.S. approach, and Rato has already stated publicly that he does not believe China is guilty of violating the fund's rules. Yesterday, he voiced doubt that a hard-nosed stance by the fund would work. "My guess is it will be more effective" if the fund continues trying to persuade Chinese officials that a more flexible currency is in their own interest, he said.
Indeed, U.S. officials joined other members of the Group of Seven major industrialized countries in issuing a communique last night that avoided any scolding of China on the currency issue. The G-7's members are the United States, Japan, Germany, France, Britain, Italy and Canada.
The mild language apparently reflected the theory that Beijing is less likely to change its policy if doing so would be perceived as bowing to pressure from the United States and other rich nations. After a meeting that included a lunch with top Chinese policymakers, the G-7 said, "We welcome the recent decision by the Chinese authorities to pursue greater flexibility in their exchange rate regime."