FOR IMMEDIATE RELEASE: January 22, 2004
SENATORS URGE CHENEY TO MAKE CHINESE CURRENCY MANIPULATION
TOP ISSUE AT DAVOS
With Yuan destabilizing world economy, bipartisan group of
Senators ask Cheney to use World Economic Forum to pressure on China
to float currency
US goods having hard time being sold in Europe because of undervaluation
of yuan
A bipartisan group of Senators today urged Vice President Cheney
to make China's currency policies a top priority at the World Economic
Forum in Davos, Switzerland. The Senators said that China's manipulation
of the yuan has become a destabilizing force in the world economy
and has led to major international exchange rate and trade imbalances
throughout the world.
In a letter being sent to Cheney today, Senators Charles Schumer,
Jim Bunning, Dick Durbin, Lindsey Graham, Evan Bayh and Christopher
Dodd asked the Vice President to discuss the impact of China's currency
manipulations at the World Economic Forum in an effort to build
international pressure on the Chinese Government to float its currency.
Cheney is leading the US delegation to the Davos forum.
"We believe China's currency policies and the deep undervaluation
of its currency, the yuan or renminbi, have not only contributed
to job loss and business failure in the United States, but they
are also leading to major international exchange rate and trade
imbalances and have become a destabilizing force in the global economy.
In your capacity as the leader of the US delegation, we respectfully
urge you to make this issue a top priority at the World Economic
Forum in Davos, Switzerland," the Senators wrote in their letter.
The yuan has been pegged to the US dollar since 1994. Given China's
enormous growth over that time, many economists believe the yuan
may be undervalued by 15% to 40%. The practical impact of China
intentionally lowering its currency's value is to make its goods
and services cheap internationally. This means that when Chinese
manufacturers export a product, they effectively receive a 15% to
40% subsidy on their exports, providing them with a nearly insurmountable
advantage over US producers.
In their letter to Cheney, the Senators wrote that China's currency
manipulation is exacerbating the US trade deficit with China which
now stands at $126 billion. The macroeconomic effect of the trade
deficit with China should be a decline in the value of the dollar
and an increase in the value of the yuan. Over time, this would
serve to "self-correct" the trade deficit: US goods would
become cheaper and Chinese goods would become more expensive. But
since China's currency is pegged to the dollar, the yuan's value
goes up or down with the dollar and no self-correction takes place.
Since China and the US sell their goods in many of the same international
markets, US goods do not gain the export advantage they should get
when the dollar falls – As US prices fall, so do the prices
of the Chinese goods they are competing against. In addition, the
Chinese government's intervention in the value of the yuan has led
it to purchase dollar denominated assets in massive volumes, creating
sovereign demand for the dollar that does not reflect true market
demand. This prevents an orderly decline in the dollar's value and,
as pressure builds, puts the dollar at risk of a precipitous fall.
In Europe, China's artificial peg to the dollar has led the Euro
to bear the brunt of the dollar's fall. With concern rising about
the dollar's value due to the United States' twin trade and budget
deficits, currency traders have only one major currency on which
to place their bets. Since China's currency value is artificially
fixed (and Japan's currency is effectively fixed through massive
government intervention), only the Euro provides traders with an
opportunity to ride a major currency up as the dollar declines.
The result has been a more than 20 percent appreciation in the Euro's
value against the dollar over the past year.
"As the yuan rides the dollar down, Chinese goods are becoming
even more competitive in the European markets. This hurts European
manufacturers and other major exporters and puts Europe's fragile
economic recovery at risk. As the United States' second largest
export market, a weakened Europe threatens our own economic recovery,"
the Senators wrote.
As China has become more internationally competitive, firms that
were investing in developing nations have shifted capital and operations
to China. In 2002, foreign direct investment (FDI) in China was
$53 billion, making it the world's largest destination for FDI while
FDI in developing countries fell by more than 25% according to the
United Nations.
Finally, China's undervalued currency is a risk to its own economy.
The expansion of China's money supply, exacerbated by its undervalued
currency, is a large factor behind the easy credit and problem loans
now plaguing China's financial sector. The Chinese government no
doubt believes it can successfully manage the inflationary pressure
now building in its economy, but there is evidence that China's
economy is overheating and creating a dangerous speculative bubble.
As Morgan Stanley's chief global strategist, Barton Biggs, has pointed
out, "A country that does not have a free market capital allocation
mechanism is uniquely unqualified to mitigate the excesses of an
investment boom."
"Despite many months of concern from members of Congress,
as well as efforts by the Administration, the Chinese government
has made no changes to its currency policies. The yuan remains fixed
at the same rate it has been for over ten years. There have been
many statements of good intentions, but no real progress. We have
already seen China contribute to one currency crisis when in 1994
it devalued its currency by more than 30 percent causing the major
dislocations in the trading flows of east Asia which precipitated
the Asian currency crisis... Mr. Vice President, if China enjoys
the benefits of membership in the international economic community,
as it clearly has, we hope you agree that it is only fair that it
abide by the community's rules and responsibilities. The time for
change is now, before the global economy is put further at risk."
Schumer is sponsoring bipartisan legislation (S. 1586) that would
apply a "symmetrical" tariff of 27.5% across the board
to products from China in line with China's currency undervaluation.
It would allow the President to remove sanctions once he certifies
that China has moved to a market-based currency. The tariffs would
kick in after a grace period of 180 days to ensure that Treasury
officials have adequate time to work with the Chinese government
to institute reforms.
For a copy of the letter click here.
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