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Fears for dollar as central banks sell U.S. assets
By Jeannine Aversa
Associated Press
Tuesday, May 17, 2005
http://news.yahoo.com/s/ap/20050517/ap_on_go_ca_st_pe/us_china_curren
cy_18
WASHINGTON -- The Bush administration warned China on Tuesday that
it could be cited as a currency manipulator and face economic
sanctions unless it moves swiftly to overhaul its currency system.
The administration has been prodding China in earnest over the last
two years to stop linking its currency, the yuan, to the U.S.
dollar. Manufacturers and other critics, including Democratic and
Republican lawmakers in Congress, contend that China's currency
system puts U.S. companies at a big competitive disadvantage and has
contributed to the loss of U.S. factory jobs.
On Wall Street, stocks vaulted higher after the Treasury Department
announcement. The Dow Jones industrials gained 79.59 points to close
at 10,331.88.
In China, central bank governor Zhou Xiaochuan said no one should
expect quick action. "Our measures will only come out after we have
done a good feasibility study," he said.
The department issued the warning as part of its twice-a-year report
to Congress. It stopped short of finding that China -- or any other
major trading partner of the United States -- was engaging in unfair
currency practices.
Separately, President Bush said Tuesday that China was not living
up to the market-opening promises it made to join the World Trade
Organization in late 2001. He urged the country to stop piracy of
U.S. intellectual property and lift barriers that keep American
goods and services out.
At a ceremonial White House swearing-in for U.S. Trade
Representative Rob Portman -- who was officially sworn in last
month -- Bush pointedly said it was in China's interest to abide by
WTO rules.
"America is a nation founded on the idea of open exchange, and free
and fair trade is a win-win for all sides," he said.
The administration said China could be branded a manipulator of
currency if the country doesn't switch soon to a flexible exchange
system -- something advocated not only by the United States but also
by other economic powers.
A 1988 law requires the Treasury Department to analyze countries'
exchange rate policies and determine whether manipulation to gain
unfair trade advantages is occurring. The law has economic sanctions
that can be imposed on countries found in violation.
"If current trends continue without substantial alteration, China's
policies will likely meet the statute's technical requirements for
designation," the department's report said.
American manufacturers say China's system has undervalued the yuan
by as much as 40 percent. The weaker yuan makes Chinese goods
cheaper in the United States and American products more expensive in
China.
The report called China's currency policies "highly distortionary" --
posing a risk to, among other things, China's trading partners and
global economic growth.
The administration said it would monitor China's progress on moving
toward a flexible exchange system "very closely over the next six
months" in advance of the Treasury's next currency report that will
be sent to Congress later this year.
Treasury Secretary John Snow, speaking to reporters, wouldn't be
pinned down on the timing of a possible designation of China should
the country not move ahead as the United States wants it to. He also
wouldn't detail how high he would like to see China's currency to
rise.
Snow did say, "It should be a real step -- it should be something
the world can see and know that China means business."
American manufacturers have pushed for China to be branded a
currency manipulator, a designation that could ultimately lead to
economic sanctions against that country.
Although National Association of Manufacturers President John Engler
was disappointed that this finding wasn't made, he welcomed the
administration's tough tone. "The language is about as hard-hitting
as it can be without actually citing China," he said. The
administration has come under increasing pressure as America's trade
deficit with China has soared to record levels, hitting $162 billion
last year, the biggest deficit ever recorded with any country.
Until recently, the administration had insisted its efforts at
financial diplomacy were working to get China to allow its
currency's value to be set by currency markets rather than
controlled by the government.
However, last month the Senate by a lopsided 67-33 vote cleared a
procedural hurdle that sets the stage for a vote on legislation that
would impose across-the-board 27.5 percent penalty tariffs on all
Chinese imports into the country unless China changes its currency
system.
Fearing the erection of protectionist barriers, the administration
then began taking a tougher approach in its public comments.
Federal Reserve Chairman also has said the time for China to act is
now.
For their part, the Chinese still insist they need more time to
shore up their banking system so it can withstand the volatility
that a flexible currency would introduce.
Central bank governor Zhou said Tuesday that China would take its
time in preparing to loosen controls on its currency, dismissing
speculation that a revaluation of the yuan could come soon.
"We are taking time to do the preparation work. We will not come out
with any measures hastily," Zhou said during a conference in
Beijing.
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