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US takes patient tack on yuan policies

By Neil King Jr (Wall Street Journal)
Updated: 2005-10-10 10:43

Despite signs of mounting impatience, Treasury officials argue in public that China is still getting acquainted with the complexities of its new system, and can't be expected to take leaps right away. "They are going through a period of self-education about how the system works," Mr. Adams said. To emphasize that point, Mr. Snow plans to make one of his first stops at China's interbank foreign-exchange market in Shanghai.

US Treasury Secretary John Snow, pictured September 2005, will arrive in China October 11 for his first visit in two years, the tussle over the yuan is again taking center stage. [AFP file]

Beijing bent to years of international pressure in July when in one day it nudged the yuan up by 2.1% against the dollar. Mr. Snow applauded the move as a good first step but made clear that the U.S. expected bigger moves in the near future. Under the new system, China lets the yuan -- which uses a basket of currencies as a reference -- move 0.3% a day either way against the dollar. But since the revaluation the yuan's value against the dollar has gone up by only 0.16%.

The yuan strengthened in special weekend trading sessions in Shanghai following a weeklong holiday. The dollar ended at 8.0876 yuan yesterday, down from 8.0920 yuan Sept. 30, its last trading session before the National Day holiday.

China has taken some small steps toward greater flexibility since July, and its central-bank governor said last week that Beijing should re-examine the yuan's value in light of the country's swelling trade surplus. Still, Chinese officials remain adamant that increased currency flexibility must come slowly, and that a fully convertible yuan is at least five years away. Chinese officials point to the havoc of the 1997 Asian financial crisis, when both Korea's and Thailand's currencies plunged amid rampant speculation.

The Bush administration faces a decision in coming weeks over whether to label China a "currency manipulator" in the Treasury's semiannual currency report, due out in early November. That designation, which many in Congress and within US industry have demanded for at least two years, would prompt talks between the US and China and could lead to sanctions.

Mr. Adams said the Treasury was just beginning to write the report, originally due October 15, and that any conclusions would depend in part on what assurances the US delegation receives while in China.

Not labeling China a manipulator could invoke a swift response from Congress, where Sens. Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, say they are poised to bring to the floor their bill to impose 27.5% tariffs on Chinese imports unless Beijing lets its currency appreciate further.

Many economists say it is only a matter of time before market forces compel the Chinese to alter the value of the yuan. With its own imports now lagging, China this year is on course to accumulate a total current-account surplus with the rest of the world of about 8% of its own annual economic output -- a figure that would normally put enormous upward pressure on any free-floating currency.

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