China snubs US on boosting yuan's value

China on Thursday thumbed its nose at US legislation aimed at forcing China to strengthen its currency, the yuan, which critics say China keeps artificially low.

A worker checks the authenticity of a yuan banknote at a restaurant in Hefei, Anhui province September 30. A bill passed by the U.S. House of Representatives that would penalize China for not letting the yuan rise faster violates the rules of the World Trade Organization, China's Ministry of Commerce said on Thursday.

Reuters

September 30, 2010

China’s central bank thumbed its nose Thursday at legislation that the US House of Representatives had passed on Wednesday in a bid to force China to strengthen the value of its currency.

The bank fixed the RMB’s value at a weaker rate than it had been before.

The move seemed calculated to underline Beijing’s insistence that it will not bow to foreign pressure over its currency, which critics say China is keeping artificially weak to give its exports an unfair price advantage on world markets.

“China has always insisted on making its policy independently,” says Zhang Xiaojing, an analyst with the Chinese Academy of Social Sciences. “If the US puts too much pressure on the exchange rate issue, China will not give in.”

“In the short term, [the vote] makes it harder for China to move, because it does not want to be seen to back down,” says Patrick Chovanec, a visiting professor of finance and economics at Tsinghua University in Beijing.

On Thursday, the Chinese Commerce Ministry rejected the bill that US lawmakers had passed to allow sanctions against currency manipulation.

“You cannot say the RMB rate is undervalued because of the US trade deficit with China and impose such protectionist measures based on this,” said ministry spokesman Yao Jian in a statement carried by the official Xinhua news agency.

Further US pressure on China over the exchange rate could "severely damage" trade ties, Foreign Ministry spokeswoman Jiang Yu warned at a press briefing later.

By a large majority, the House of Representatives had passed a bill allowing the US Commerce Department to treat “fundamentally undervalued currencies” as an illegal export subsidy. That would allow US companies to ask Washington to impose countervailing duties to make up for China’s price advantage.

The bill must pass the Senate and win President Obama’s signature – neither of which is by any means certain – before becoming law.

Shortly before Wednesday’s vote, China’s central bank ended its quarterly meeting by reaffirming its policy of letting the RMB slowly gain value. The Chinese currency has risen by 2.2 per cent against the US dollar since last June, when Beijing scrapped a two-year peg to the dollar.

The bank said it would “further improve the yuan’s exchange rate formation mechanism … and increase exchange rate flexibility.” This was almost exactly the same wording used in June’s statement, indicating that Beijing’s exchange policy remains unchanged despite recent criticism from US officials, including Obama.

“To a certain extent, US pressure does have an effect, because China cares about other countries’ opinions and about its responsibilities as a big country in today’s complex international economic environment,” says Dr. Zhang.

“But the economy is still recovering from the crisis, so the government wants to keep the exchange rate stable,” he adds.

Though election-year politics played a large role in the House vote, giving lawmakers something to talk about when voters ask what they are doing to protect US jobs, says Professor Chovanec, “it is not entirely bluff.”

“There are growing frustrations about whether China has heard what the rest of the world has been saying,” he adds. When the G20 meets next month in Seoul, “this vote will give Obama leverage.”