US law­mak­ers quick to crit­i­cise China on cur­rency drop

The Pak Banker - - INTERNATIONAL BUSINESS/SPORTS -

U.S. law­mak­ers have been quick to con­demn the sud­den drop in the value of Chi­nese cur­rency as dam­ag­ing for Amer­i­can busi­nesses and work­ers, re­viv­ing an is­sue that once was one of the big­gest sources of ten­sion be­tween the two world pow­ers.

Yet the ini­tial re­sponse from the Obama ad­min­is­tra­tion of­fi­cials has been mild, even pos­i­tive. They say Bei­jing has in­di­cated it is tak­ing steps to­ward mar­ket­de­ter­mined ex­change rate -some­thing that even China's big­gest crit­ics in Washington have been de­mand­ing for years.

While China's cur­rency pol­icy has been a peren­nial sore spot in the re­la­tion­ship, it has dropped in the peck­ing or­der of pri­or­ity con­cerns dur­ing Pres­i­dent Barack Obama's ten­ure, as the yuan has ap­pre­ci­ated sig­nif­i­cantly against the U.S. dol­lar since 2010. China's ter­ri­to­rial am­bi­tions in the seas of East Asia and al­leged cy­ber spy­ing on a mas­sive scale against U.S. gov­ern­ment and busi­nesses are likely to dom­i­nate the agenda when Chi­nese Pres­i­dent Xi Jin­ping makes his first state visit to the United States in Septem­ber.

But a con­tin­ued drop in the value of the yuan against the dol­lar could be­come an is­sue of grow­ing con­tention and give am­mu­ni­tion to crit­ics of China and fuel long-run­ning re­sent­ment over the trade im­bal­ance be­tween the U.S. and Asia's largest econ­omy, which to­taled $343.1 bil­lion last year.

"The key thing will be, does the cur­rency be­gin to move in a va­ri­ety of di­rec­tions and show mar­ket-ori­ented volatil­ity? If it does, that will un­der­cut ar­gu­ments that this is a one-way move to pro­mote ex­ports and ma­nip­u­late the cur­rency," said Scott Kennedy, di­rec­tor of Pro­ject on Chi­nese Busi­ness and Po­lit­i­cal Econ­omy at the Cen­ter for Strate­gic and In­ter­na­tional Stud­ies think tank.

"That will make things eas­ier when Xi Jin­ping vis­its," Kennedy said. But he added that if the yuan drops con­sid­er­ably more and it leads to a big in­crease in Chi­nese ex­ports, "then it will give gen­uine am­mu­ni­tion and jus­ti­fi­ca­tion for those who are crit­i­cal." The ini­tial re­ac­tion from U.S. law­mak­ers to the de­pre­ci­a­tion, par­tic­u­larly Democrats, has been swift and neg­a­tive. The yuan's 1.9 per­cent de­val­u­a­tion Tues­day against the U.S. dol­lar was its big­gest one-day fall in a decade. By Thurs­day, the yuan had fallen by a to­tal of 2.9 per­cent for the week.

"When China doesn't play by the rules it costs Penn­syl­va­nia jobs," said Demo­cratic Sen. Bob Casey, re­fer­ring to the tra­di­tion­ally in­dus­trial state he rep­re­sents. "For years, China has rigged the rules and played games with its cur­rency," said Sen. Chuck Schumer, a New York Demo­crat. "Rather than chang­ing their ways, the Chi­nese gov­ern­ment seems to be dou­bling down."

Bei­jing said the yuan's de­cline was a one-time event and part of changes aimed at mak­ing the tightly con­trolled cur­rency more mar­ket-ori­ented. On Thurs­day, the cen­tral bank tried to ease fears of more big declines, say­ing the yuan was close to "mar­ket lev­els."

Un­til now, the cen­tral bank set the yuan's value each day based on a bas­ket of cur­ren­cies that is be­lieved to be dom­i­nated by the U.S. dol­lar. That meant the yuan rose with the dol­lar over the past year, hurt­ing Chi­nese ex­porters and rais­ing the threat of po­lit­i­cally dan­ger­ous job losses.

But Ni­cholas Lardy, an ex­pert on China's econ­omy at the Peter­son In­sti­tute, said it was "pre­pos­ter­ous" to sug­gest that China has sud­denly taken the move to stoke growth in an econ­omy that has been weak­en­ing for three years. He said it would take at least a dou­ble-digit de­pre­ci­a­tion in cur­rency value for it to have an im­pact on growth, and it would take six months or so to be felt, even if it dropped by that mar­gin.

He said China's move was pri­mar­ily mo­ti­vated by its de­sire to en­ter the bas­ket of cur­ren­cies used to set the value of the In­ter­na­tional Mon­e­tary Fund in-house cur­rency, called Spe­cial Draw­ing Rights. The other cur­ren­cies are the dol­lar, the euro, the yen and the Bri­tish pound.

China's ac­tion came a week af­ter a re­port by IMF staff last week showed a mixed per­for­mance of the yuan on meet­ing key fi­nan­cial norms, rec­om­mend­ing that China wait un­til at least Oc­to­ber 2016 to join. The U.S. Trea­sury Depart­ment's re­ac­tion Tues­day to the de­pre­ci­a­tion was mea­sured. "China has in­di­cated that the changes an­nounced to­day are another step in its move to a more mar­ket-de­ter­mined ex­change rate. We will con­tinue to mon­i­tor how these changes are im­ple­mented and con­tinue to press China on the pace of its re­forms," the depart­ment said in a state­ment.

Lardy char­ac­ter­ized Trea­sury's re­ac­tion as "mod­estly pos­i­tive" as it waits to see how things evolve and make a de­fin­i­tive judg­ment. He said con­gres­sional crit­i­cism was in­evitable. "Some will con­tinue to rail at China what­ever hap­pens. That's been the history," he said. John Fris­bie, pres­i­dent of the US-China Busi­ness Coun­cil, which ad­vo­cates for Amer­i­can busi­nesses, said its mem­ber­ship is typ­i­cally more con­cerned about the im­pact of China's eco­nomic slow­down, ris­ing costs, reg­u­la­tory re­stric­tions and in­tel­lec­tual prop­erty theft than cur­rency.

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