Senators Press Beijing on Yuan

Citing recent congressional opposition to a Dubai firm’s bid to take over several U.S. ports, three visiting U.S. senators warned Beijing that it needed to further revalue the Chinese currency or face the wrath of American lawmakers.

“If you think relations between our countries are strong, you’re not reading the tea leaves back home,” Sen. Lindsey Graham (R-S.C.) told foreign reporters here Tuesday, summarizing the message he and his colleagues are delivering to Chinese officials this week.

A bill proposed by Graham and Sen. Charles E. Schumer (D-N.Y.) threatens to slap 27.5% import tariffs on all Chinese goods unless Beijing satisfactorily revalues its currency. Graham, Schumer and Sen. Tom Coburn (R-Okla.) are on a five-day trip to Beijing, Shanghai and Hong Kong before a March 31 deadline for submitting the legislation.

The senators said the bill enjoyed strong support in both the House and Senate and might have the votes to override a presidential veto. As evidence, they cited the 62-2 Senate vote in opposition to a Dubai maritime group proposal to manage a few U.S. ports. The firm defused outrage over the deal by agreeing to sell its U.S. port operation to an American entity.

The senators said they would like China to enact necessary currency reforms rather than having them imposed externally.

Beijing urged Washington to keep things in check. “We hope the U.S. side will not politicize these issues and magnify them,” a government spokesman said, quoting Foreign Minister Li Zhaoxing.

Last summer, China lifted the value of the yuan by 2.1% against the U.S. dollar and said it would allow the yuan to float within a tight band against a basket of foreign currencies, instead of being pegged rigidly to the U.S. dollar. Some American politicians and businesses had complained that the yuan was undervalued by as much as 40%, giving Chinese exporters an unfair trade advantage and contributing to the bulging U.S. trade deficit.

With U.S. political pressure mounting and China’s economic machine chugging along, officials here have allowed the yuan to strengthen against the dollar at a faster pace in recent days.

Analysts expect the exchange rate to fall below 8 yuan to the dollar within a few weeks. This hasn’t happened in more than a decade with China’s currency pegged at 8.28 to the dollar.

“Having the [yuan] break into the 7s is going to be important” for the U.S., said Jonathan Anderson, chief economist for Asia at UBS Securities in Hong Kong.

Still, policymakers in Beijing have repeatedly said that currency adjustments will be gradual. Furthermore, most analysts don’t expect the yuan to strengthen by more than about 3.5% for the entire year -- far short of the double-digit appreciation that critics of China’s currency policy are seeking.

Many analysts have argued that across-the-board tariffs on Chinese goods will backfire on America’s economy, since many U.S. manufacturers produce goods there for markets around the world. Unlike the visiting senators, the free-trade-leaning Bush administration has taken a more patient tone with China on economic issues.

But on Tuesday, a senior U.S. trade official visiting Shanghai, citing the $202-billion American trade deficit with China last year, warned of growing protectionism and predicted that China would be involved in more trade dispute cases before the World Trade Organization.

The senators also criticized China for lax policing of trademark and copyright infringement, arguing that the Chinese government needed to use its clout to shut down violators.

“What we’re showing is that we’re serious about China playing fair,” Schumer said.

President Hu Jintao and Premier Wen Jiabao are not expected to meet with the group, although the senators will see top officials in the central bank and commerce and resources ministries this week.

Analysts said they expected a rocky patch ahead for Sino-U.S. relations. Hu and President Bush are scheduled to hold a Washington summit in late April, a few days before a Treasury Department deadline to pass judgment on whether China is manipulating its currency.

Other factors weighing against China include a mid-term election year when representatives are prone to protectionism, Bush’s declining popularity, which makes the administration less able to fend off protectionists, and a trade deficit approaching 6% of gross domestic product.

“It’s common sense among economists that 3% of GDP is a yellow card, 5% a red card and 6% really something,” said Jin Canrong, a professor of American studies at Renmin University in Beijing. “This is a basic fact, and it’s making Americans uncomfortable.”

UBS’ Anderson said the senators’ trip was largely about grabbing newspaper headlines. “What they’re hoping to get is PR more than anything else,” he said. “They have to score points at home.”

The senators’ strong words and veiled ultimatums Tuesday were met with equally strong words in some Chinese circles.

“If they are coming with the intent of exerting pressure, then they will get nothing from the trip,” said Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation, under the Ministry of Commerce. “No one can exert pressure, no one can interfere with China’s affairs. The U.S. is not the father of the world.”

Analysts, meanwhile, proposed several steps China might take to help diffuse bilateral tension. One would be to allow greater exchange rate flexibility, continuing the modest strengthening seen in recent days, although many Western economists agree that further revaluation of the yuan isn’t the answer to America’s deficit and that Beijing is loath to move too quickly since it doesn’t want to jeopardize China’s fragile banking system or economic growth.

To appease Washington, Beijing could go on a U.S. buying spree by, for instance, buying Boeing aircraft and Westinghouse nuclear reactors. It also could speed efforts to diversify its export markets -- China accounts for 25% of the U.S. trade deficit -- and increase domestic demand.

Chinese analysts added that the U.S., for its part, could encourage savings, discourage spending and ease restrictions on high-tech exports to China.

“Freeing up the currency by the end of March is impossible,” said Song Guoqing, a professor of economic research at Peking University. “In the meantime, I think China needs to speed up its currency reform. And the U.S. should learn to be a bit more patient about it.”

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Magnier reported from Beijing and Lee from Shanghai.