China’s Currency Manipulation and Legislative Initiatives: China’s Currency Manipulation and Legislative Initiatives Robert B. Cassidy Director International Trade and Services


The Important Questions : The Important Questions Does China manipulate its currency? Is the Yuan undervalued? Does it’s undervalued currency hurt the United States? Does China’s manipulation help China? What do the various legislative initiatives do to correct the problem?


#1: Does China Manipulate the Exchange Rate for the Yuan: #1: Does China Manipulate the Exchange Rate for the Yuan 1994: China unified its dual exchange rate and depreciated it by 50% China has fixed its exchange rate at 8.28 yuan/dollar since 1995 Exporters exchange dollars for yuan from the SAFE and at no other exchange rate.


#1: Does China Manipulate the Exchange Rate for the Yuan: #1: Does China Manipulate the Exchange Rate for the Yuan Fixed exchange rate does not violate WTO or IMF rules Violates WTO rules when exchange rate frustrates the intent of the WTO agreements. Violates IMF rules when a country manipulates its exchange rate to gain an unfair competitive advantage.


#2 Is the Yuan undervalued?: #2 Is the Yuan undervalued?


Chinese Trade Data Incorrect: Chinese Trade Data Incorrect


Chinese Trade Data Incorrect: Chinese Trade Data Incorrect


#2 Is the Yuan Undervalued: #2 Is the Yuan Undervalued NAM has argued that Yuan is undervalued by 40% Undervalued currency is an export subsidy and a surtax on U.S. exports Since Asian financial crisis, other Asian countries have pegged their exchange rates to the yuan/dollar. China is the most egregious but an overall Asian problem


#3 Does the undervalued yuan hurt the United States?: #3 Does the undervalued yuan hurt the United States?


#3 Does the undervalued yuan hurt the United States?: #3 Does the undervalued yuan hurt the United States? Trade deficit for 2004 was 162 billion, highest bilateral trade deficit Undervalued currency a tax on U.S exports A subsidy on Chinese exports to the U.S. Foreign exchange reserves over $600 billion, 80% held in U.S. dollar reserves Foreign investment is cheap in China Speculative flows increasing as rumors spread


#3 Does the undervalued yuan hurt the United States?: #3 Does the undervalued yuan hurt the United States? NAM estimates that U.S. manufacturing has suffered 60% of imports from China displace U.S. production; 40% at expense of other suppliers Price pressure on domestic suppliers Manufacturing jobs declined by 2.8 mil since 2001


#4 Does manipulation help China?: #4 Does manipulation help China?


#4 Does China’s Exchange Rate Manipulation Help China?: #4 Does China’s Exchange Rate Manipulation Help China? Foreign direct investment in China exceed $60 billion, second only to US Economy growing at 9.5% China needs to create 15-25 million jobs Hurts China in long run: Overheated economy Inflation increases


#5 What is Congress Doing?: #5 What is Congress Doing? Schumer/Graham (S. 295): Authorizes negotiations on currency and if not successful, apply 27.5 % import duty Stabenow (S. 14): Apply 27.5% import duty if China doesn’t revalue yuan Collins/Bayh (S. 593): Provisions on countervailing duties apply to non-market economy countries (e.g., China) Lieberman: Requires negotiation and appropriate action against currency manipulation


#5 What is Congress Doing?: #5 What is Congress Doing? Sanders (H.R. 728): Withdraw normal trade relations treatment. English (H.R.1216): Apply countervailing duties against non-market economy countries (e.g., China) Ryan/Hunter (H.R. 1498):Exchange rate manipulation subject to countervailing duties and China safeguard actions


Status of Legislation: Status of Legislation Schumer’s bill will be voted on by August Bayh/Collins will have hearing in Finance Committee Ryan/Hunter has 60+ co-sponsors Because of defense provisions, has dual oversight English has 34 co-sponsors; referred to Ways and Means Committee


Exchange Rate Scenarios: Exchange Rate Scenarios IMF proposal: Move to more flexible exchange rate (appreciation) Drop hard peg; move to basket of currencies Broaden the band from the current 1% Treasury: adopt floating exchange rate Capital markets still closed and weak Danger that currency will depreciate CCC: Appreciate by 40% but maintain peg Basket and broader band acceptable but not priority


Possible Revaluation Scenarios: Possible Revaluation Scenarios Market predicting small appreciation (5-8%), a wider band (only 1% currently); and based on a basket of currencies. May be too modest to result in significant adjustment


What’s next?: What’s next? Pressure mounting on euro and other market determined currencies U.S. under pressure to reduce twin deficits. Imbalances becoming more extreme Search for a soft landing: Pressure on China to realign Multilateral accord similar to Plaza Accord


Lessons learned: Lessons learned China does not move unless forced to move China understands and respects power Failure to use it; lose it China will threaten and bluster Important to stand firm and defend U.S. interests.


Robert B. Cassidy: Robert B. Cassidy Collier Shannon Scott 3050 K St. NW Washington DC 20007 202-342-8400