-->Washington: China must devalue

Or at least adjust currency peg to dollar

By Greg Robb, CBS.MarketWatch.com
Last Update: 12:01 AM ET Oct. 8, 2003

WASHINGTON (CBS.MW) -- In Washington terms, the debate over China's currency could be called a perfect storm.

Sometime in late July, the political heat and humidity caused by 2.7 million missing U.S. factory jobs hit a cold front of an exploding U.S. -- China bilateral trade deficit.

The result has been a breathtaking political storm, with senior lawmakers on both sides of the political spectrum introducing resolutions and legislation in ever-increasing emotional terms summed up in five words: China does not play fair.

The slightly longer version was: China's peg to the dollar is keeping the yuan artificially low and taking U.S. manufacturing jobs to China.

<font color=red>"China only understands one thing. They've got to be pushed against the wall to make the yuan float," said Rep Don Manzullo, R-Il., the chairman of the House Small Business Committee.</font>[img][/img]

China has always had its critics in Washington and Congress only narrowly granted the country permanent trading status in 2000. But the ferocity of the debate over the value of the yuan has quickly flooded the entire political landscape and threatens to be a major issue as the U.S. presidential election next year draws nearer.

"I'm astounded at the speed with which this issue has become a central issue and the extent to which it's moved in both the Administration and Congress," said Jerry Jasinowski, president of the National Association of Manufacturers, the trade group leading the charge to eliminate China's dollar peg.

Steadfast allies of free trade joined the attack. Unions and management announced alliances to plan formal trade action against China for keeping its currency low. The senior Senator from New York introduced legislation with 12 colleagues that would slap a 27.5 percent tariff on all Chinese imports.

"There are times when economic weakness and politics make for strange bedfellows. This appears to be one of those times," said Stephen Roach, chief economist at Morgan Stanley.

"When did all these bills (against China) come about? They came about after they all went home for summer recess. They must have heard something back home -- because they all came back -- flying in -- with proposals," said Bob Cassidy, the former Assistant U.S. Trade Representative for China and now director of International Trade and Services at Collier Shannon Scott, a Washington, D.C. law firm.

"There are a lot of people without jobs and a lot of companies complaining about China," he added.

Cassidy said the majority of complaints are coming from"second-tier and third-tier companies."

"The bigger companies have already moved to China," he said.

Arguments against the notion of Chinese currency manipulation -- that the U.S. has been losing factory jobs for decades, that China's fixed exchange rate had helped end the Asian financial crisis -- have been quickly lost in the angry sea.

But as China has dug in its heels on the issue, a new unofficial Washington consensus has emerged that simply seeks that China should embark, as soon as practical, on a road towards eventually floating its currency.

Some temporary arrangements, such as pegging the yuan to a basket of currency, would be acceptable, according to the critics. The important thing is for China to get started down the road, they say.

"I think what we need now is a transition plan. China has become a major industrial power. And industrial powers of the nature of the Chinese have to be a fair player in the world economy and they need to transition to that," said Peter Hellman, chief financial officer of Nordson, (NDSN: news, chart, profile) a multinational company with operations in China, summing up a view held by many.

The growing consensus in Washington seems to be around a proposal by Morris Goldstein and Nicholas Lardy, senior fellows with the Institute for International Economics. They have argued for"a medium size revaluation of the renminbi" in the neighborhood of 15-25 percent, a widening of the currency band, and a switch to a three-currency basket peg.

"China can't float until they get their banking system in order, a minimum five year exercise," Lardy said in an interview.

C. Fred Bergsten, the head of the IIE, said the battle for a one-shot revaluation instead of a float isn't over.

"I hope we can get that change imbued in people's minds, but I don't think it is there yet," Bergsten said."[Treasury Secretary John] Snow knows and everyone else knows that there is absolutely no way China can float its exchange rate. There really isn't a market, so you don't know what would happen."

Jasinowski, of the NAM, signaled his approval of a phased approach.

"I think that I know very few people who said you ought to just let it float. I mean, I think that's a very unrealistic view," Jasinowski said at a press conference last week.

"My own view is that this has to be phased. I think that anyone who analyzes the interconnections on trade and financial markets would agree with that," he said.

One factor in calming the Washington waters has been the political footwork displayed by the White House and Treasury Secretary John Snow.

Dared by Congressional critics of China to criticize China's peg, Snow did just that and more. He went to China and talked about the need for China to float its currency. He jammed a statement asserting the principle of flexible exchange rates into the latest G-7 statement.

Snow's rhetoric soothed both sides of the issue -- the jangled nerves of the pro-China business lobby in Washington, who viewed Snow's remarks as sticking to high principals and not dipping into political demagoguery -- and the manufacturers demanding a new currency regime for China.

Of course, at its core, the issue of China and its currency is a political one.

"Every four years, we have a presidential election in which the 'outs' accuse the 'ins' of coddling China in various ways and then whoever gets elected, they do the same thing. So I think what is going on is that Democrats are attacking Mr. Bush for implementing Mr. Clinton's China policy. The Bush administration is trying to inoculate itself against such accusations," said Professor Thomas Rawski, of the University of Pittsburgh economics department.

But Snow's political maneuverings have not gone over as well in New York as they have in Washington.

David Goldman, foreign exchange analyst for Banc of America Securities, questioned"the wisdom of allowing (Bush top political advisor) Karl Rove to make international monetary policy."

"Nothing will bring back America's lost manufacturing jobs, surely not re-jiggering Asian currency parities," Gibson said."Beggar-thy-neighbor economics have introduced a new and unwelcome risk to the outlook."

Stephen Roach, chief economist at Morgan Stanley, told a Congressionally-appointed U.S.-China Economic and Security Review Commission, that"scapegoatism" was at work.

"In tough economic times, politicians always need a scapegoat. That's what this wave of China bashing is really all about," he said.

Roach said that cutting off Chinese imports would only lead to higher imports from other countries, not increased U.S. manufacturing.

"The emotion in Washington is huge, cannot be taken lightly. It is up to us as responsible citizens to deal with that in a way that does not hurt the global economy," Roach said.

Trying to stay calm during the chaos has been the U.S. China Business Council, a trade group of mostly multinationals like Walt Disney Co. (DCQ: news, chart, profile) and Motorola (MOT: news, chart, profile) with significant operations in China.

"The claim that the United States must compel China to achieve certain revaluation of its currency in order to solve the problems of the American manufacturing sector is not rooted in reality," said Robert Kapp, the president of the council.

But Kapp has nothing but praise for the Bush administration's handling of the issue.

"The Administration has conducted itself quite well," said Kapp."In spite of all the suddenness of this fury, I do not think we are looking at some kind of unlimited meltdown with China, even on U.S.-China trade relations," said Kapp.

"The issue of the RMB is a distraction. It is amazing to me how many people know it is, privately say it is, but don't come out and say it out loud," he said.

"We all want China to move to float their currency," Kapp said.

The Treasury has not set any deadline for China.

"There is not a deadline, not a timeline," said John Taylor, Treasury undersecretary for international affairs.

Greg Robb is a senior reporter for CBS MarketWatch based in Washington.


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