China to G20: The Yuan is Not the Problem

The US Treasury and the Congress appear to be intensifying pressure on the China to allow the yuan to appreciate.   Other officials may weigh in ahead of the G20 meeting (June 25-27).

Congressional support is reportedly strong for a bill that would allow US businesses to incorporate estimates of the yuan’s under-valuation in setting countervailing duties they can impose on imports that are said to be unfairly subsidized.

The US Treasury Dept can release its semi-annual assessment of the currency market, which it had previously postponed, which could accuse China of manipulating the fx market.

All the jawboning in the world, and even these moves by the US Treasury and Congress, are likely to prove futile.  Simply put, the US simply lacks the leverage to get China to do something that it does not want to do. Moreover, China probably appreciates that the Congressional action probably will not stand up to a challenge at the WTO.   The risk for the US to lose such a WTO case could have far reaching implications for the yuan discussion going forward.

Chinese officials are not just playing defensively, but have gone on offense.  They argue that given the nature of the 2007-2009 financial crisis and the current European sovereign crisis, it is a distraction to focus on the yuan.  The yuan is neither the cause of the financial crisis nor a hurdle for recovery.

It seems a bit ironic that most officials trying to convince China to move on its currency say that it is in China’s interest.  This seems disingenuous.  They really mean that their country would benefit from a stronger yuan.   That perhaps is the most notable thing about the US Congress position. It speaks directly to the harm caused to US business.  They are not looking out for what is good for China.  The problems with the US Congressional stance is that they make a fetish out of the currency, rather than the precise trade practices themselves that tilt the playing field, which the US Trade Representative Office has articulated.

The risk is that if the US and others try to turn the G20 into a forum that pressures China, the PRC could either downgrade their participation or boycott it altogether.  It probably does not help the US case very much that Defense Secretary Gates as recently as Wed was defending US arms sales to Taiwan, which China argues is a violation of US-Sino agreements and is a major irritant to Chinese officials.