The yuan’s 23 percent rally against the dollar in the past five years doesn’t impress Republican presidential candidate Mitt Romney, who vows on the campaign trail to brand China a “currency manipulator.”
The view is more tempered in Washington, where Treasury Secretary Timothy F. Geithner praises China for letting the yuan trade more freely. Lawmakers from Romney’s own party, including House Speaker John Boehner and Representative Dave Camp, say a Senate-backed bill punishing China for undervaluing the currency to boost exports ignores such issues as intellectual-property theft and might prompt a trade war.
As Geithner and Secretary of State Hillary Clinton head to Beijing this week for talks with China’s leaders, the yuan is losing its place as the key source of friction in U.S.-China economic relations, leaving the most provocative American rhetoric behind the curve.
The U.S. trade deficit with China shrank to $19.4 billion on a monthly basis in February, the least since March 2011. U.S. goods exports to China have almost doubled in the past five years, climbing to a record $104 billion last year.
In terms of appreciation of their currency, “quite a bit has taken place,” Christine Lagarde, managing director of the International Monetary Fund, said during an April 20 discussion in Washington with Charlie Rose. A narrowing in the country’s current-account surplus is “already a major change, so things are heading in the right directions,” she said. “It’s typical of the Chinese policy to take one step at a time.”
The surplus, the broadest measure of trade in goods and services, fell to 2.8 percent of gross domestic product last year from 10 percent in 2007 as the currency rallied, commodity costs rose and recessions in developed markets cut export demand. The reversal was “sharper and more persistent than expected,” the IMF said in April.
It also pushed the surplus below the 4 percent level Geithner said in October 2010 was “likely to emerge as the basic benchmark countries look to” for judging whether imbalances are excessive.
The Obama administration may focus more on persuading the world’s second-largest economy to better respect patents and curb handouts to state-owned companies as the yuan’s value becomes less of an issue. While Geithner said in an April 26 speech that the yuan “needs to appreciate further,” he only briefly mentioned the currency, emphasizing that the government should loosen controls on the financial system.
The yuan “increasingly looks like the wrong focus,” and the U.S. has a stronger case to make on China’s subsidies and lack of intellectual-property protection, said Stephen Green, head of greater China research for Standard Chartered Plc in Hong Kong.
The median forecasts of economists surveyed by Bloomberg News show the yuan appreciating to 6.16 per dollar by year-end and 6.05 in 2013 from 6.3102 on April 27. The currency gained 0.05 percent today to close at 6.3070 in Shanghai after rising as much as 0.19 percent earlier, the most in two weeks.
While China has shown “good progress” in making the currency more flexible, “I expect there will still be pressure from U.S. politicians, given this is an election year,” Zhang Zhiwei, chief China economist in Hong Kong at Nomura Holdings Inc., said in an e-mail.
Romney has promised to go after the nation more aggressively because he says Obama has failed to “take China to the mat.”
“If I’m president, I will label China a currency manipulator and apply tariffs” wherever needed “to stop them from unfair trade practices,” the former Massachusetts governor said during a March campaign rally in Cleveland.
Such practices, “from intellectual-property theft to market-access restrictions to currency manipulation, are undermining the international trading system and hurting American businesses and workers,” Romney spokeswoman Andrea Saul said in an April 27 e-mail.
The Treasury Department is required to report twice a year on exchange-rate policies of major trading partners and enter into direct talks with those it designates as manipulators. The last such country was China, in 1994.
Lawmakers in Congress also are taking aim at the yuan. Democrats, including Representative Sander Levin of Michigan, have urged the House to take up a bill passed in the Senate last year to let companies seek tariffs compensating for the currency’s value.
Boehner, of Ohio, has called the measure “dangerous” and said it could cause China to retaliate. In an April 25 interview with CNBC, Geithner also mentioned “the risk of a trade war” from labeling China a currency manipulator.
Representative Camp, who heads the House Ways and Means Committee that deals with trade, said the Senate-backed bill is “too narrow.” While the Obama administration should apply more pressure to allow the yuan to appreciate, “we need to look at our range of issues with China,” the Michigan Republican told reporters April 26. The currency’s rise is “a positive trend,” he said.
Obama is no apologist for China, having set up a new enforcement panel to combat unfair trade practices by governments including Beijing. Obama also has filed six complaints with the World Trade Organization against China since taking office three years ago, compared with seven by former President George W. Bush from 2001, when China joined the Geneva-based trade arbiter, through the end of his term in January 2009.
Obama said March 13 that that while the U.S. prefers “dialogue” on trade issues, “I will take action if our workers and our businesses are being subjected to unfair practices.”
Geithner and Clinton are scheduled to be in Beijing tomorrow and May 4 to meet with officials including Vice Premier Wang Qishan and State Councilor Dai Bingguo. U.S. Trade Representative Ron Kirk also is slated to attend the talks.
The currency is “the wrong issue, and it’s time for a more enlightened approach to U.S.-China trade and economic relationships,” Stephen Roach, a senior fellow at Yale University in New Haven, Connecticut, and former chairman of Morgan Stanley Asia, said. “It’s ludicrous to think that America is being squeezed because of a bilateral trade imbalance with China. We have trade deficits with 88 countries.”
The threat of a diplomatic incident between the U.S. and China hasn’t derailed the meeting so far, with Assistant Secretary of State Kurt Campbell dispatched to Beijing early to prepare for the gathering. Blind human-rights activist Chen Guangcheng -- who sought shelter last week at the U.S. Embassy after fleeing house arrest -- was escorted by American diplomats to a hospital today as the two sides worked out a deal to resolve a case that threatened to upset the talks.
Chen, an advocate for villagers who resist forced abortions, said he didn’t want asylum abroad and was reunited with his family after U.S. Ambassador Gary Locke took him to the Beijing hospital, American officials told reporters on condition of anonymity. China promised Chen will be treated humanely, the officials said. The foreign ministry demanded the U.S. apologize for allowing him into the embassy.
The Chinese government’s steps toward letting the currency trade more freely include giving markets a bigger role in setting the exchange rate. The central bank on April 16 widened the yuan’s trading band against the dollar to 1 percent from a daily range of 0.5 percent in place since 2007.
Since then, the yuan has weakened 0.11 percent and the new trading band has been used only once, on April 27, showing the measure has had limited impact.
China also is moving to boost its currency’s global role, setting up Hong Kong as an offshore hub for yuan-denominated trades and investment. Sales of so-called Dim Sum bonds almost tripled to 52.2 billion yuan ($8.3 billion) in the first quarter from a year earlier, according to data compiled by Bloomberg. HSBC Holdings Plc last month became the first European bank to list yuan bonds in London.
The value of the currency, which contributed to last year’s record $295 billion U.S. trade deficit with China, was cited as a barrier to U.S. growth by two-thirds of investors, traders and analysts in the December Bloomberg Global Poll. After the longest period of unemployment above 8 percent since the Great Depression, American voters also consistently tell pollsters the economy is their top issue in the 2012 campaign.
Tight Election Race
The risk “for U.S.-China relations is that in a tight U.S. election race, China will become a focus for both Romney and Obama to out-gun each other,” Alistair Thornton, an economist in Beijing at IHS Global Insight, said in an e-mail. With the jobless rate “running a lot higher than desired, fairly or unfairly, China becomes an easy political target.”
Even after strengthening, China’s currency remains undervalued by at least 12 percent, based on estimates compiled in a December report by the Congressional Research Service. A Bloomberg Government Study the same month found that a 7 percent annual increase in the real value of the yuan would cut the U.S. trade deficit with China in half by the end of 2014.
Companies competing with low-cost Chinese imports, such as Benton Harbor, Michigan-based appliance maker Whirlpool Corp., or that serve China’s growing market, including General Motors Co. in Detroit, would be helped if the yuan continues to appreciate. Manufacturers including Mattel Inc. in El Segundo, California, would be hurt by the higher cost of Chinese-made products they sell.
A stronger Chinese currency contributes to increases in input costs that executives at the Barbie-doll maker “work very hard every year” to try to offset, Mattel Chief Financial Officer Kevin Farr said in February.
Even so, Ted Dean, chairman of the American Chamber of Commerce in China, which represents more than 1,200 companies, said his group’s biggest policy concerns include the investment-approval process, intellectual-property rights and transparency in rule making -- not the yuan.
“You can push for currency or push for something else,” Dean said in an April 25 interview. “We would argue that pushing for something else is more productive.”