Addressing overdue Chinese currency revaluation

The Bush Administration and the Chinese Government are off the hook, at least for now. The Fair Currency Alliance (FCA), of which AMT is a leading member, has decided against filing a Section 301 (of the Trade Act of 1974) petition that would charge the C

The Bush Administration and the Chinese Government are off the hook, at least for now. The Fair Currency Alliance (FCA), of which AMT is a leading member, has decided against filing a Section 301 (of the Trade Act of 1974) petition that would charge the Chinese Government with violating World Trade Organization rules by significantly undervaluing its currency, the yuan, to gain a trade advantage. The FCA reluctantly came to this conclusion, but realized that holding the Section 301 petition in abeyance and working cooperatively with the Bush Administration was the sensible course to take — at least in the short run.

Currently, the Chinese Government is holding more than $400 billion — equal to one-third of China's Gross Domestic Product — in currency reserves, almost all of which is in U.S. dollar instruments. To soak up the dollars, the Chinese Central Bank has been forced to print even more yuan, or renmimbi. This, in turn, has forced the already hot Chinese economy, which has been growing at a rate of more than 9% per year, dangerously close to the breaking point. Moreover, China's desperate attempt to take U.S. dollars off the market, with the goal of keeping its currency undervalued, is evident in the costly, high-risk dollar-buying strategy that it is currently practicing. Amongst other things, this practice overloads the U.S. Government with hundreds of billions of dollars in low-cost loans as the Chinese buy short-term Treasury bills to store as reserves.

Obviously, this can't go on for long before the entire international monetary-trading system is distorted. Concern over this matter was one of the FCA's main motivations in considering the Section 301 petition. The current situation is causing unfair trade conditions and distorting investment decisions, as U.S. and foreign companies and investors flock to China to take advantage of the abnormally low-cost manufacturing platform created by that undervalued currency. Furthermore, China's hyper-growth in recent months has dramatically affected the commodity markets, as cement, steel scrap, copper, and petroleum are drawn into the rapidly growing industrial powerhouse. The FCA estimates that the Chinese currency is 40% undervalued, and in recent years, both the World Bank and The Economist have provided estimates of even greater disparity. Whatever the exact number, this problem must be addressed with the utmost urgency.

For the time being, the FCA is willing to work with the Bush Administration, which has engaged the Chinese Government over the past year to redress the undervaluation problem. FCA members, and their supporters in Congress, will be patient as the Administration helps the Chinese to undertake a revaluation — either in the form of a re-pegging of their currency in relation to the dollar, or as a modified currency float.

We agree with the Bush Administration that there are many reasons why this revaluation would be in China's own interest, but our patience — and that of the U.S. Congress — is running out. If no action is forthcoming, the filing of the Section 301 petition, or even harsher Congressionally initiated action, will likely occur this year.

By Dr. Paul Freedenberg Vice President-Government Relations AMT The Association For Manufacturing Technology

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