US backs off in currency stoush with China
October 16, 2010 - 9:03AM
The Obama administration backed away on Friday from a showdown with Beijing over the value of China's currency that would have caused new frictions between the world's only superpower and its largest creditor.
The Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the US congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.
Washington and the European Union accuse China - set to become the world's second-largest economy after the United States this year - of keeping the yuan artificially low to boost exports, undermining jobs and competitiveness in Western economies.
Fears are growing of a global "currency war" as major trading powers, such as the United States and Japan, seek to weaken their currencies while emerging economies such as Brazil and South Korea raise or threaten tougher controls to limit capital flows.
The decision to delay the Treasury's semi-annual currency report reflects a desire by the Obama administration to pursue diplomacy to resolve the dispute with China rather than provoke a confrontation that could potentially lead to a trade war and affect long-term interest rates.
In July, China held $US847 billion in US government debt.
In its statement, the Treasury seemed to be encouraged by China's recent action to allow its currency to rise by roughly 3 per cent against the dollar since June 19.
"Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month," it said. "If sustained over time, this would help correct what the IMF (International Monetary Fund) has concluded is a significantly undervalued currency."
China argues that moving too quickly with currency reforms could devastate its export-driven economy.
It blames the United States for sluggish growth, high debts and an easy monetary policy that has flooded the market with newly printed dollars, weakening the US currency and putting pressure on emerging countries to keep their currencies low.
But Washington argues that Beijing could relieve that pressure by letting the yuan strengthen.
'Not a scapegoat'
The Treasury said the G20 gathering in Seoul would give world leaders an opportunity to look at how best to rebalance the global economy. This was not just the responsibility of China and the United States, it stressed.
In another important summit, leaders of the Asia Pacific Economic Cooperation forum will meet on November 13-14.
"The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings," it said.
China left little doubt about the rancor that would ensue if it is branded as a currency manipulator - a largely symbolic move by the United States that would mandate more consultations with Beijing but no immediate penalties.
"The Chinese yuan should not be a scapegoat for the United States' domestic economic problems," Commerce Ministry spokesman Yao Jian said on Friday.
The decision to delay the Treasury report appears to have been taken at the last minute. Industry sources had been primed to expect it earlier on Friday.
The Obama administration, seeming to anticipate criticism from US lawmakers who are pushing for stronger action against China, brought forward an announcement of an investigation into whether Chinese support for its clean energy sector violates international trade rules.
But that was not enough to appease Democratic Senator Charles Schumer, who has sponsored legislation to get tough with China over its currency practices.
"The Obama administration is treating the symptom but not the disease," he said. "An investigation into China's illegal subsidies for its clean energy industry is overdue but it's no substitute for dealing with China's currency manipulation."
Congress eyes duties
The Treasury's decision may raise pressure on the Senate to approve a bill passed by the House of Representatives that would allow the United States to slap duties on imports from countries with fundamentally undervalued currencies.
"Democrats and Republicans alike in Congress are prepared to move legislation confronting China's currency manipulation this year," Schumer said. "We hope to have the administration's support but will go forward without it if necessary."
There had been speculation Obama might be tempted to label China as a currency manipulator for the first time in 16 years to look tough before the elections in which his Democrats risk big losses over discontent with his handling of the economy.
But there are concerns about angering China, whose support is needed on issues such as rebalancing the global economy, climate change and the nuclear programs of Iran and North Korea.
In an article published on Friday, Chinese central bank governor Zhou Xiaochuan pledged a continuation of yuan reform but only on Beijing's gradual terms.
"The yuan exchange rate will be basically stable at a reasonable and balanced level," he wrote in China Finance, a magazine published by the central bank.
The Treasury Department is mandated by law to issue a report every six months on whether any country is manipulating its currency for an unfair trade advantage.
But the last time any administration - Republican or Democrat - has cited a country under the 1988 currency law was in July 1994, when China was put in the spotlight.
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