The money China lends to the United States through its purchase of U.S.
government bonds is the proceeds of the flood of consumer goods that Chinese
factories sell into insatiable U.S. markets, a demand that has led to a
mushrooming Sino-U.S. trade gap.
Treasury, which has thus far loathed to use its main tool -- designating
China a foreign exchange manipulator in its semiannual currency report -- this
year urged the IMF to toughen surveillance of nations' currency practices.
"We need a good system in place with real teeth and hard triggers for action
when our trading partners haven't lived up to their end of the bargain,"
Grassley said.
Grassley and Baucus's bill would modify Treasury's currency report to focus
on misaligned currencies rather than manipulation, making it easier to bring the
authority of global institutions like the IMF to bear on countries that do not
let financial markets set relative currency values.
Treasury is currently weighing whether to name China a manipulator in the
latest incarnation of the report, which had been scheduled for mid-April but has
been delayed.
One banking source on Tuesday said Treasury officials were seeking advice
from currency trading firms on how markets would react to Treasury designating
China a manipulator.
Initial reaction from Wall Street to Grassley-Baucus proposals was muted.
Jason Bonanca, director of foreign exchange with Credit Suisse in New York, said
the bill "is not seen as anything more than posturing" by lawmakers.
Earlier on Tuesday in Shanghai, the yuan rose modestly, a climb traders said
had gained momentum in recent weeks.
There currently is wide-ranging discussion among IMF members, much of it
fueled by the U.S. Treasury, about reforms to give the lender a more active role
in the global economy.
One much-discussed proposal envisages the fund taking a tougher and more
specific line on foreign exchange and adopting yardsticks against which currency
policies can be measured.
Under Grassley and Baucus's legislation, international lenders like the Asian
Development Bank might turn down loans to countries that do not let their
currencies float freely.
The Grassley-Baucus proposals also proposes such penalties as refusing
violators additional voting power, a significant measure coming in a year when
the fund's strongest shareholders are seeking to give emerging market countries
a greater say.