Fed's help enlisted for trip to pressure China

Fed's Help Enlisted
for Trip to Press China

By Stephen R. Weisman
The New York Times
Thursday, November 23, 2006

http://www.nytimes.com/2006/11/23/business/worldbusiness/23trip.html?_r=...

WASHINGTON -- Treasury Secretary Henry M. Paulson Jr. has enlisted Ben S. Bernanke, the Federal Reserve chairman, to join an unusual delegation of cabinet members to China next month that will press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday.

The trip in mid-December, to be led by Mr. Paulson, a former Goldman Sachs chairman with extensive experience in China, escalates the pressure on the Beijing leadership to crack down on piracy, open up its economy to outside investors, and allow the value of the Chinese currency to fluctuate more freely, Treasury officials say.

It also has the effect of putting pressure on the Treasury secretary to get results from the Chinese at a time of mounting pressure from Democrats and Republicans to curb what they view as China's reliance on exports.

Congressional leaders have long demanded that China strengthen its currency, the yuan, and take other steps to modernize its economy. European leaders have been waging a parallel campaign. They argue that such actions are needed to reduce China's huge trade imbalances with the West.

Because China exports far more than it imports, it has piled up reserves of foreign currencies that are expected to approach $1 trillion in coming months. China owns several hundred million dollars in American-denominated debt and may be eager to use its reserves to purchase American companies, a step that faces resistance in Congress.

The trip will not be the first time a Federal Reserve chairman and a Treasury chief have met with their Chinese counterparts. Such sessions have occurred from time to time under a Chinese-American joint economic committee established several years ago. But the sessions are usually on the fringes of larger economic meetings, like a brief meeting last year in China involving Treasury Secretary John W. Snow and Alan Greenspan, then chairman of the Federal Reserve, during a larger meeting of 20 leading economic nations.

What is different this time, government officials say, is that Mr. Bernanke is traveling to China with Mr. Paulson and several other American cabinet secretaries for the express purpose of deepening the Chinese-American dialogue.

Mr. Bernanke, along with Mr. Paulson, shares responsibility for overseeing the United States economy and the major role that China now plays in it. He is expected to repeat what he and other central bankers have said in recent years: that the huge borrowing from China by the United States to finance its trade imbalance is not sustainable in the long run. Mr. Bernanke, who would not comment on his plans, has in the past urged the Chinese to be more flexible with the yuan and their economy.

Mr. Bernanke, however, is not expected to join in any direct pressure applied by the Bush administration, officials said, nor to offer specific policy prescriptions.

Most international economics experts say that China can take steps to correct these fund imbalances by deregulating its state-controlled economy, allowing greater imports and foreign investment, and introducing incentives for Chinese to consume more and save less.

Mr. Paulson's trip, and the fact that he is to be accompanied by Mr. Bernanke, who as chairman of the Federal Reserve is supposed to be independent of the administration, is aimed at persuading the Chinese to take these Western demands more seriously. The Treasury's hope is that a broad dialogue on economics, energy, the environment, and other issues will move China more than pressure on specific issues.

"This is such a high-level delegation that it's going to raise the bar for China, especially on issues of currency, by demonstrating the breadth of our economic interdependence," said Michael J. Green, a former director of Asian policy under President Bush.

"It's a smart strategy by Paulson, and it's showing the Chinese enormous respect," added Mr. Green, who is now a scholar at Georgetown University and the Center for Strategic and International Studies in Washington. But he added, "By the same token, Paulson is putting enormous pressure on himself to deliver."

Another unusual backdrop to the China trip, scheduled for Dec. 12 to 16, is the pressure from Capitol Hill. Bush administration officials say they recognize that in the new Democratic-controlled Congress, anger at China will quickly reach a fever pitch if the Beijing government rebuffs American requests for steps to ease the trade imbalances.

Trade was a major issue in the elections as many candidates contended that cheap Chinese exports and unfair economic practices had thrown Americans out of work.

Leading the criticism of China in Congress is Representative Nancy Pelosi, the California Democrat who will serve as speaker of the House beginning in January. Since the early 1990s, she has been a vocal critic of China's economic policies and its human rights record. But criticism of the Chinese has not been limited to the Democrats. Many Republicans in Congress have assailed China for its military spending, and the administration says China has fallen short in helping to defuse crises in Iran, North Korea, and Sudan.

This year, Senators Charles E. Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, yielded to a request from Mr. Paulson and withdrew a bill that would have threatened China with increased tariffs if it did not let the value of its currency rise in the open markets.

A higher value for the yuan would make exports to the United States more expensive and imports cheaper, presumably reducing the trade deficit.

But Mr. Schumer and Mr. Graham said they would come back with another form of the legislation in the coming year if China did not respond more positively to the economic pressures from the United States.

"Nothing has gotten the Chinese to budge so far," Mr. Schumer said in an interview this week. "Taking such a large delegation is a demonstration of how important this is. The liability is that if Paulson goes with all these people and once again brings back nothing, it's going to turn up the heat in Congress."

The Treasury Department has not announced who is going to China, but administration officials say the delegation is to include Susan C. Schwab, the United States trade representative; Energy Secretary Samuel W. Bodman; Commerce Secretary Carlos M. Gutierrez; Health and Human Services Secretary Michael O. Leavitt; and Stephen L. Johnson, administrator of the Environmental Protection Agency.

Mr. Paulson won approval from President Bush to lead an interagency group of officials to negotiate with China on matters like the piracy of software, name-brand designer goods and pharmaceuticals, and on steps to allow European and American banks and financial services to sell credit cards and other products to Chinese consumers.

On the energy front, the Bush administration wants to share technology with China and permit American investment in conservation, energy-saving devices and other technologies. China is also interested in American expertise in cleaning up its air and water, while the United States wants to help China with immunization and disease prevention programs.

Mr. Paulson gave a lengthy speech on China in September, and on a trip there shortly thereafter warned not to expect any quick responses on American requests. But he also said that he was impatient for at least some signs of progress.

What the Bush administration can offer China in return, many experts say, is a pledge by Mr. Bush to block protectionist measures in Congress like the one pushed by Mr. Schumer and Mr. Graham.

"The Chinese are very unsettled by the results of the election," said Jeffrey A. Bader, a director of Chinese studies at the Brookings Institution. "They're trying to figure out how much to give to Paulson so Paulson can keep the wolves at bay."

* * *

Join GATA
at the
2007 Vancouver Resource Investment Conference
Vancouver Convention and Exhibition Centre
Sunday and Monday, January 21 and 22, 2007

http://www.cambridgeconferences.com/ch_jan2007.html

Admission is free for those who register in advance. The conference has arranged discount rates at the Pan Pacific Hotel adjacent to the convention center.

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.GATA.org. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.