In its economic dealings with China, the Bush Administration has frequently come across as being obsessed with the country's currency, prodding Beijing in public and private to change its fixed-rate system. In July those efforts finally bore fruit when China scrapped its policy of pegging the yuan to the dollar and allowed its currency to appreciate a modest 2.1%.
Now, as Treasury Secretary John W. Snow and Federal Reserve Chairman Alan Greenspan prepare for meetings in Beijing on Oct. 16-17, the Administration is putting forward a more nuanced strategy for tackling the trade deficit with China. It still wants the yuan to rise. But it's also pressing Beijing to boost domestic consumption and liberalize its financial markets more quickly, including removing caps on foreign ownership of financial firms. "We take a holistic view," says Treasury Undersecretary for International Affairs Timothy D. Adams. "We're not just focused on one aspect."
The U.S. isn't wedded to bilateral pressure, either. Instead, the Treasury is trying to shift some of the heat on China to the International Monetary Fund. In a speech on Sept. 23, Adams suggested the IMF was "asleep at the wheel" when it came to policing the currency policies of its members -- a charge IMF officials denied. But if the U.S. can prod the IMF into calling for a yuan revaluation, Washington can keep up the pressure without playing the role of bully.
The broader U.S. approach reflects economic reality. Currency changes alone were never going to cure the bilateral trade imbalance, which could hit $220 billion this year, vs. $162 billion in 2004. The wider focus also diverts some attention from the currency issue, which has threatened to trigger a major confrontation with China. Many U.S. lawmakers are incensed by what they see as China's policy of keeping its currency low to boost competitiveness. Some want to punish Beijing with tariffs as high as 27.5% on Chinese exports.
If the Treasury can point to progress on other fronts in its dealings with China, it can argue that a trade war is unnecessary. Bank of America Corp (BAC ). recently got the go-ahead to buy a 9% stake in China Construction Bank, and UBS (UBS ) is taking control of Beijing Securities Co. Adams called China's financial liberalization "a bright spot" but said Beijing should move faster. The Americans want China to promote a credit-card industry by setting up an independent credit bureau. U.S. banks also want China to lower some of the stiff capital requirements imposed on their branches in China.
The risk is that China could misinterpret the Treasury's broader strategy as a sign that the U.S. is content with changes made so far to the yuan. That's not true, a point Snow and Greenspan are sure to stress. "Their job is to convince the Chinese that patience [on the yuan] is not infinite," says Morris Goldstein, senior fellow at Washington's Institute for International Economics.
The real test of the holistic approach could come in November, when the Treasury presents its semi-annual currency report to Congress. It will then have to decide whether to cite China as a currency manipulator and risk giving a green light to Congress to retaliate. U.S. officials are hoping China will use the upcoming meetings to unveil new steps to cut its trade surplus. With President George W. Bush set to visit Beijing in November, another crisis in China-U.S. relations is the last thing Snow & Co. want.
By Rich Miller in Washington, with Brian Bremner in Hong Kong
Edited by Rose Brady