After months of what was seen as indecision by U.S. manufacturers, the Bush administration has suggested China revalue its currency to help save itself from its own irrational exuberance.
In a report on exchange rates and trade, the Treasury Department said China cannot continue its policy of fixing the yuan at roughly $8.28 without being accused of unfairly manipulating its exchange rate.
The report appears to be a response to legislation requiring the administration to impose sanctions if China does not alter its exchange rates within six months.
“It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions,” the Treasury report said.
“China's rigid currency regime has become highly distortionary,” said Treasury Secretary John Snow. “It poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows and overinvestment.”
U.S. textile manufacturers say China's exchange rate policy — coupled with its low wage rates and export tax rebates — gives China's garment makers a 38- to 40-percent price advantage on goods it ships to the United States.
But economists note Treasury officials cannot do much arm-twisting because China's profits from those sales are being returned to this country to fund the debt incurred by the administration's tax cuts and lack of meaningful reductions in government spending.
China purchased $200 billion in U.S. securities in 2004 and could buy an estimated $300 billion in 2005, helping keep interest rates relatively low since the Treasury does not have to bid up rates to keep money flowing into T-bills.
China has become a two-edged sword for the U.S. economy. “The U.S. consumer is being saved by cheap imports from China,” said one economist. “Everything is much cheaper because of China's prices and that is cushioning the blow of higher energy costs and steel prices in this country.
“Meanwhile, U.S. interest rates are kept low, which helps prevent the U.S. economy from going into a prolonged slump.”
Bruce Scherr, president and chief executive officer of Informa Economics (formerly known as the Sparks Companies), says it's not clear what might happen if China could be persuaded to revalue the yuan or allow it to float freely.
“In an odd way, it might be a real positive for China and the Asian countries that supply much of the raw materials needed to fuel its economic boom,” said Scherr, speaking to the Mid-South Chapter of the National Agri-Marketing Association. “It might make the Chinese economy even stronger and create a stronger Asia.”
He and others believe tough talk may have little impact. “Jawboning doesn't work,” says Scherr. “Allowing markets to take their natural course does. We have to learn to work with China. The Chinese won't be browbeaten into doing things that are not in their interest. They are going to be an integral part of our future.”