Softer Line for Change in China

Facing growing pressure to take a harder line with China over trade, Treasury Secretary John W. Snow showed Tuesday that pushing the Chinese government to further loosen control over its currency would be a delicate task.

Snow, speaking at a news conference in Tokyo, said the U.S. was “anxious to see the Chinese fulfill the commitment they made to allow market forces to play a larger role in setting their currency’s value over time. They’ve gotten on the path that allows them to do so, and we’d like to see China continue on that path.”

But upon arrival in Shanghai on Tuesday evening, Snow took a softer, more patient tone. In a meeting with the American Chamber of Commerce here, Snow barely touched on the currency issue. Instead, chamber members said, he spoke broadly about urging China to make further market reforms to grow and stabilize its economy.

“His basic message was, ‘It’s in China’s own interest to move toward market-based mechanisms,’ ” said Jeffrey Bernstein, the group’s chairman.

Whether the Chinese will buy that line of reasoning remains to be seen. Under pressure from the United States, China changed its currency system July 21, abandoning a longtime peg to the dollar and letting the yuan appreciate 2.1% against the dollar. The move was commended by many American politicians as a good first step and for a while mollified critics who said the yuan was badly undervalued and gave China an unfair advantage in trade.

Since the initial rise in value, however, the yuan has risen less than 0.3% against the greenback.

About the time Snow arrived here, Chinese officials released data showing that China’s trade surplus fell to $7.6 billion in September from $10 billion in August. Chinese imports held steady, but the pace of export growth last month dropped.

Further details weren’t available, but analysts said the currency revaluation probably had a small effect on exports. Some of the decline was probably due to quotas that restricted Chinese exports of textiles to the United States and Europe. China’s trade surplus with the U.S. is still approaching a record $200 billion this year -- which has led to calls from some in Congress and industry to take tough action against China if it doesn’t do more.

Snow’s visit to China, along with Federal Reserve Chairman Alan Greenspan and other top U.S. officials, comes about a month before the Bush administration is expected to decide whether Beijing has manipulated its currency, which could subject it to trade sanctions.

“They’re trying to avert a train wreck,” Barry Naughton, a Chinese economy expert at UC San Diego, said of the American delegation in China. “There’s very serious danger that economic issues between the U.S. and China are going to surge up and disrupt relations.”

Until fairly recently, commerce was generally the bright spot in Sino-U.S. relations that were strained by differences over human rights, Taiwan and other political and security issues. But China’s rising economic clout, its booming textile exports and its push to secure oil have hurt bilateral trade ties.

Many economists, including Greenspan, say China’s currency isn’t the answer to the U.S. trade and budget deficits, a problem more closely linked to America’s high consumer spending and low savings rate. But some analysts believe that the yuan is undervalued by as much as 40%, making Chinese exports artificially cheap in overseas markets, and lawmakers have seized on the currency issue as a litmus test to China’s good-faith effort to play fair in trade.

Sen. Charles E. Schumer (D-N.Y.) said that if China did not allow the yuan to rise further in value, he and other senators would seek a vote by next month on a bill that would impose a 27.5% tariff on all Chinese imports.

Although the prospects of such a vote are unclear, Snow has expressed concerns about rising protectionist sentiments in America.

Yet experts doubt that the Treasury secretary will come away from the talks with Chinese leaders with much more than a commitment that they’ll continue to move toward a market-based exchange rate. And Snow himself, in limiting his public comments on the yuan, appears to be lowering expectations of any immediate action from the Chinese.

In theory, many Chinese officials and business leaders agree that China would benefit by moving to a market-based currency system. The head of China’s central bank, Zhou Xiaochuan, has stated that China should reconsider the value of the yuan in light of the nation’s growing trade imbalance with the world.

But the question is timing. Ha Jiming, chief economist at China International Capital Corp., an investment bank in Beijing, said it would probably be three years before the yuan went up in value by 10%, if that much.

“I don’t think the visit by high-level U.S. officials would trigger an accelerated pace of reform,” Ha added.

Indeed, after Snow’s comments in Tokyo Tuesday, Chinese officials gave no sign Beijing would move faster in loosening its controls on the yuan.

Foreign Ministry spokesman Kong Quan urged the U.S. side to “heed fully the Chinese position on exchange-rate reform.”

Chinese government leaders face pressure from industry groups that warn of severe job losses and bankruptcies from further appreciation of the yuan.

China’s shipbuilders, for example, say the recent currency change already has taken a big bite out of their profits. Liu Dei, the supply department director at Jiangsu New Century Shipbuilding Co., said 32 of the company’s 42 ships in production were affected by the yuan revaluation because the deals were conducted in U.S. dollars, meaning the builder would receive at least 2.1% less yuan after conversion from dollars. Liu said that would translate to a loss of as much as $3.7 million for 10 ships.

“If the yuan appreciates more, the whole industry will have nothing to eat,” Liu said. “If you ask me what officials should stress [to the American delegation], I would say, ‘We cannot make any more concessions.’ ”

A stronger yuan would also hurt the profits of many U.S. firms that manufacture or buy parts or products in China and then sell them around the world. The last thing many of these companies want, though, is for the U.S. to engage in a trade war with China or take other steps that would lead to a damping of American investments or prospects for sales in the booming Asian country.

Leading Wall Street investment banks, for example, are holding a large securities conference in Beijing early next week and are looking for Snow to prod the Chinese to open their capital markets.

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Associated Press was used in compiling this report.