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US raising tensions over China's currency
Updated: 2005-05-18 08:31

The Bush administration has issued a much stronger warning to China over its currency, saying China could be deemed a "manipulative trade partner" if it does not revaluate the yuan soon.

Washington has been pressuring China to hike the exchange rate of yuan vs US dollar.
"It's our view that the time has come" for China to have more flexible exchange rates, U.S. Treasury Secretary John Snow said Tuesday.

U.S. Treasury Secretary John Snow gestures during a news conference at the U.S. Treasury Department in Washington May 17, 2005. Secretary Snow released the Foreign Exchange Report during the event.
U.S. Treasury Secretary John Snow gestures during a news conference at the U.S. Treasury Department in Washington May 17, 2005. Snow released the Foreign Exchange Report during the event. [Reuters]
China, which uses exchange controls to peg its currency yuan to the dollar, has been the focus of critics in the United States that its prices from exported goods are very low.

The low prices, Washington critics say, put pressure on U.S. domestic manufacturers, who cannot compete with the Chinese counterparts on prices of goods such as textiles, toys, furniture, electronics, and other manufactured goods.

The Treasury report said that if China continued its current yuan rate without substantial change, its policies would likely meet the US statute's technical requirements for designation as a manipulative trading partner.

"Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and global economic growth," The Treasury report said.
However, Snow stopped short of saying that the Chinese should allow their currency to float freely along with the dollar, euro and other world currencies. He said the Chinese financial system, while making great progress in recent years, was not ready for the stress of a free-floating currency.

Snow spoke as the United States was releasing its twice yearly "Report to Congress on International Economic and Exchange Rate Policies."

An adjustment in yuan rate would make Chinese goods more expensive in the United States, but would make U.S.-made goods cheaper for Chinese consumers.

However, China has countered that Bush administration has been for many years refuting exports of hi-tech products and equipment to China, leading to the trade imbalance in China’s favor.

Also, Chinese economists claimed that even if China’s central bank agrees to hike the value of yuan to the US dollar by 10 percent, it won’t alleviate the trade deficit impasse of the United States. Chinese products’ competitiveness on world market lies in the country’s incessant supply of cheap labor force.

Analysts said that China had been sending mixed messages of late concerning its currency revaluation.

On Tuesday, Vice Premier Zeng Peiyan told a business forum in Beijing that China would push forward steadily with reform of the yuan. But a day earlier, Premier Wen Jiabao insisted Beijing would not bow to foreign pressure for a rise in the currency. Wen said politicizing the economic issue wasn’t the way to solve the problem.

On Monday, Chinese President Hu Jintao said China aimed to lift the size of its economy to $4 trillion by 2020 -- effectively quadrupling its gross domestic product on the basis of 2000. Hu, delivering the keynote address at the Fortune Global Forum in Beijing, said the 2020 target was a "formidable challenge" that would require an uphill battle.

A 2020 gross domestic product of $4 trillion would put China in sight of Japan, which is now the world's second-largest economy ($4.1 trillion) behind the United States ($10 trillion).

Hu told the international business audience at the forum China would continue to work hard to open up to overseas investors. "China will unswervingly pursue a basic policy of opening up to the rest of the world and will further pursue our economic and technical cooperation with the rest of the world," Hu said.

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