International
Sanctions Bill on China's yuan/renminbi currency peg introduced in US Congress
By Finfacts Team
Jun 22, 2005, 05:54

China's currency is known as 'yuan' or 'renminbi' - yuan is Mandarin for unit; renminbi is Mandarin for peoples' currency. On Tuesday, a spokesperson for China's Ministry of Commerce said on textile exports: In fact, the growth of China’s textile exports is closely related to the Chinese companies with US, EU, Korean and Japanese investments. The textile exports of foreign-invested companies accounts for over 1/3 of the total. 70% of the export growth of textiles freed from quota control this year was realized by foreign-funded companies. Most of China’s textile exports were OEM products, thus China only takes the less than 10% processing fee. The restriction on Chinese textile exports will naturally injure the interests of the brand owners, retailers, foreign-invested companies in China, textile machinery and raw material exporters to China, and the consumers. The low and middle-income families and taxpayers will pay for this. As analyzed in an article on Financial Times of April 27, “ the reintroduction of quota in the name of safeguard measures is in essence a tax collection on consumers. It places a heavier burden on poor families”.

Treasury Secretary John Snow criticised the bill and others that threaten China with sanctions if it does not move to a more flexible exchange rate.

"I think anything that points in the way of closing down trade, interfering with trade, isolationism and protectionism, those are all the wrong way to go," Snow said in an interview on Bloomberg television.

US Representative Phil English of Pennsylvania, who introduced the bill, titled Currency Harmonization Initiative through Neutralizing Action (China Act), with three other Republicans in the House of Representatives, said the measure reflected their growing frustration over China's practice of pegging its currency at 8.28 yuan/renminbi  to the dollar.

"One of the biggest burdens facing American manufacturers is the blatant mercantilism out of China," English said at a press briefing. "We feel the time has come to draw a line in the sand."

English and other lawmakers maintain that the currency peg keeps the value of China's yuan at an unfairly low level, giving that country's manufacturers a price advantage over their American competitors.

Snow said he would argue against measures to shut off the US market to Chinese goods when he and Federal Reserve Chairman Alan Greenspan testify Thursday at a Senate Finance Committee hearing on U.S.-China economic relations.

"At the same time, it's important that the Chinese respond, that they play by the rules of the game, that they deal with the intellectual property issues that they need to address, that they deal with opening markets to us," Snow said.

Snow said Tuesday that China should "move to a flexible exchange rate."

The US Treasury would be required to issue its first report on the yuan 60 days, if the bill became law.

If currency manipulation is discovered, the Treasury Department would have to impose a tariff on all of China's exports to the United States within 30 days. The size of the tariff would be equal to the percentage of yuan manipulation that is found and could be adjusted annually if China later revalues.

The bill would require the Bush administration to take faster action than another proposal that won the support of 67 senators last month on a procedural vote.

A US Senate bill proposed by Senator Charles Schumer, a New York Democrat, and Sen. Lindsey Graham, a South Carolina Republican, would threaten China with a 27.5 percent across-the-board tariff if it did not revalue its currency within 6 months. It also contains a provision allowing the White House to delay that action for up to two years.

Fed Chairman Alan Greenspan, has said that a revaluation of the yuan would have little impact on the US trade deficit.

Chinese urge less reliance on exports

Meanwhile Xinhua, China's State news agency says that China should boost domestic demand, because its economic growth relied too heavily on exports, susceptible to trade friction and pressure for a stronger currency, domestic media said Tuesday.

China's over-reliance on exports also gave the United States more lever age in pushing for a revaluation of the yuan, the Financial News said in a commentary.

“Over-reliance on exports, particularly on exports to the United States, certainly will lead to uncontrollable risk in the country’s international trade,” the newspaper said.

China's total imports and exports were equivalent to 70 percent of the country’s gross domestic product last year.

“The whole economy suffers once there is any turbulence in foreign trade, putting China in an unfavorable position in negotiations in resolving trade disputes,” said the paper.

“Expanding domestic demand will be the fundamental way to reduce trade frictions,” it said.

China agreed this month to limit annual growth in exports of various categories of textiles to the European Union to between 8 and 12.5 percent.

Disputes over textile imports boiled over in April and May as other countries complained of a surge in Chinese sales following the end of a global quota system Jan. 1.

China replied that its trading partners had had years to prepare for the new system — although it had also agreed to a mechanism to limit export surges when it joined the World Trade Organization.

The European Union has now moved on to investigating China's sales of cheap shoes.

Some of China's trading partners, in particular the United States, have said China must allow the yuan to rise in value because the current peg of 8.28 to the U.S. dollar was too low and made China’s exports much cheaper than they would be if the currency floated freely.

China has said it would make the yuan more flexible according to its own needs, rejecting suggestions that any move on the yuan would help narrow the U.S. current account deficit.