What's the best course on China's currency?

China's currency continues to pose problems to the U.S. economy. Last month a group known as the "China Currency Coalition" filed a Section 301 petition with the U.S. government, charging that the Chinese were taking unfair trade advantage of the U.S. by undervaluing their currency, the yuan. Originally, AMT — The

Association For Manufacturing Technology had been a part of that coalition; however, AMT decided that filing would be counterproductive and chose to split from the group.

For the past year, I have explained the problems created by China's undervalued currency, which is pegged by the Chinese government at as much as 40% below what its freely traded value would be. The Chinese government set the value of the yuan at approximately 8.25 to the dollar in 1994 and has fiercely defended it at that fixed level for the past 10 yr, despite the spectacular growth (averaging more than 9%/yr) and strength of the Chinese economy during those years. The front-line of this defense consisted of the Chinese government buying more than $450 billion — one-third the value of China's current GDP — over that period, thereby ensuring the low yuan valuation.

This economic-defense policy has quickly transformed China into an attractive platform from which to export goods around the world, and, consequently, a highly attractive country in which to invest.

It is not an accident that China passed the U.S. in machine tool consumption in 2002, and, two years later, has achieved nearly twice the U.S.-consumption level. In addition to the artificially cheap currency, China has positioned itself as an appealing investment option, with various incentives backed by a surprisingly friendly and efficient bureaucracy and regulatory structure.

Unsurprisingly, as a result the Chinese economy has overheated, causing commodity shortages, among other things. The speculative bubble of recent years has also weakened many Chinese banks, and, fearing financial collapse, the Chinese government is reluctant to take any significant remedial action. To exacerbate the situation, China does not have a central bank similar to our Federal Reserve, whose job has been described as "taking away the punchbowl after the party gets going."

In this atmosphere, the original coalition — of which AMT was a member — wanted to pressure the Chinese into doing the right thing. Upon learning of the coalition's plans to file a Section 301 petition, the U.S. Treasury warned that any Section 301 unfair trade petitions related to the Chinese currency would be rejected. After much debate, the China Currency Coalition split, with one group deciding that pressure was the only way to galvanize the Chinese to action. That group filed its petition in early September and, true to its word, the Bush Administration immediately rejected it.

Where do we go from here? Although AMT was not a part of the coalition that chose to file the most recent Section 301 petition, we strongly believe that a Chinese currency revaluation is essential to both the U.S. and the Chinese economies. However, we heeded the U.S. government's threat to reject the petition, seeing no reason for meaningless gestures. Moreover, attempting to file the petition — with the Presidential election only months away — could have possibly served to politicize the issue.

While AMT believes that this is a bipartisan issue, we will continue our efforts to convince the Bush Administration that the China currency-valuation issue is the most pressing trade issue our nation faces. And while confrontation has not proved to be an effective tactic, this does not mean we will not continue to speak out on an issue so vital to our industry and the world economy.

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