21 Mar 2010
March 21 (Bloomberg) -- China warned the U.S. against imposing sanctions over the value of the yuan, arguing that the exchange rate issue has been politicized and that a rise in protectionism threatens the global economic recovery.Pressure on China to strengthen the yuan does "no good to anyone," China's Commerce Minister Chen Deming said at the China Development Forum in Beijing today. China's trade balance likely slipped into the red in March, although the yuan was stable, showing that exchange rate changes have a "limited" impact on trade, Chen said.
Tensions over China's currency are mounting, with President Barack Obama facing increased calls from American lawmakers to step up pressure on China for keeping its exchange rate artificially low. Chen today warned that sanctions against China that amounted to protectionism would hinder growth and raise the risk of a "double dip recession."
"No matter how tough both sides sound now, they'll eventually come back to the negotiation table for a mutually beneficial solution," as any U.S. sanctions will be detrimental to both, Li Wei, an economist with Standard Chartered in Shanghai, said in a telephone interview.
Li said he expects the yuan to rise by 2 percent this year, a pace that won't harm the economy.
Five senators, including Charles Schumer of New York and Lindsey Graham of South Carolina, last week introduced legislation to make it easier for the U.S. to declare currency misalignments and take corrective action. The Treasury Department is to decide next month whether to label China as a currency manipulator.
‘Blind Eye'
China "won't turn a blind eye" if the Treasury Department's April 15 report labels the Asian nation as a currency manipulator and sanctions follow, Chen said in comments broadcast on China Central Television. The government will "deal with" any escalation of the dispute, he said.
China's leaders have repeatedly said that their yuan policy isn't the cause of the U.S. trade gap.
"We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," Premier Wen Jiabao said on March 14.
The government has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade. It allowed the currency to appreciate 21 percent in the three years before that.
The yuan "actually isn't particularly undervalued anymore," Goldman Sachs Group Inc. Chief Economist Jim O'Neill said last week. "It's unfortunate that we have so much political angst around this. The key thing is that post-crisis, China is importing a lot."
Into Red
In March, China will probably record its first deficit since April 2004. The surplus had already narrowed to a one-year low of $7.6 billion in February after a 34 percent decline last year. The U.S. trade deficit was $37.3 billion in January, shrinking from a record $67.8 billion in August 2006 as American consumers slowed spending amidst the recession.
The decline in China's trade surplus failed to appease U.S. lawmakers because 73 percent of the gap was with the U.S., Chen said. That was mainly because of curbs on exports to China, including technologies and parts that China wanted, he said.
Increased Chinese spending is a better way of reducing trade imbalances, Morgan Stanley Asia Chairman Stephen Roach said March 19 in a Bloomberg TV interview. "We're lashing out at China rather than tending to our own business," which is raising U.S. savings, Roach said.
China has accumulated a record $2.4 trillion of reserves, and $889 billion of U.S. government debt, partly a consequence of its exchange-rate policy.
Growth Hindered
Global economic growth would be about 1.5 percentage points higher if China stopped restraining the yuan and running trade surpluses, Paul Krugman, Princeton University professor and Nobel laureate in economics, said at an Economic Policy Institute event in Washington on March 12. He said the U.S. may need to get more aggressive in its talks with China, perhaps by treating the exchange-rate as a countervailing duty or other export subsidy.
"We have a world economy which is depressed by China artificially keeping its currency undervalued," Paul Krugman, Princeton University professor and Nobel laureate in economics, said in a March 19 interview.
