June 19, 2010 / 12:58 AM / 10 years ago

ANALYSIS - China inaction may earn currency manipulator label

WASHINGTON (Reuters) - A rebuff from China on pleas to strengthen its currency makes it increasingly likely the United States will ratchet up pressure on Beijing by formally labeling it a currency manipulator.

A vegetable vendor counts yuan banknotes at a market in Changzhi, Shanxi province June 13, 2010. REUTERS/Stringer/Files

Designating China a currency manipulator carries no immediate penalty other than to embarrass Beijing, which sees itself fulfilling its destiny as a world power.

It would also require President Barack Obama’s administration to intensify talks with China and could eventually lead to sanctions if the United States were to file and win a dispute at the World Trade Organization and Beijing refused to comply.

“If the press conference were at 3:15 today, I’d bet a fair amount of money they’d label (China) a currency manipulator,” said Derek Scissors, an economics research fellow a the Heritage Foundation’s Asian Studies Center.

But that could change if Beijing suddenly revalues its currency by even a small amount or some pressing foreign policy concern pushes the currency issue aside, he added.

Obama set the stage for a showdown in a letter released on Friday to his Group of 20 partners, which include Chinese President Hu Jintao and other leaders of industrialized and emerging market countries.

Without mentioning China by name, Obama said “market-determined exchange rates are essential to global economic vitality,” highlighting a source of increased tension between the two countries as Chinese growth rockets ahead and U.S. unemployment remains near 10 percent.

Lawmakers have for years pushed the United States to formally label China a currency manipulator in a semiannual report due each April 15 and Oct. 15.

They contend China’s exchange rate is undervalued by as much as 25 percent to 40 percent, giving Chinese companies a huge unfair price advantage in international trade.

DECISION DEFERRED

The Obama administration, after giving China a pass in two previous reports, appeared set to hit Beijing with the manipulator label in April, Scissors said.

Instead, it abruptly postponed the report, giving China more time to act.

U.S. Treasury Secretary Timothy Geithner explained the delay by saying U.S. engagement with China at high-level bilateral talks in Beijing in late May and Group of 20 meeting of leaders and finance ministers in June were more likely to yield results.

But the decision also cleared the way for Hu to attend a nuclear summit hosted by Obama in early April without the embarrassment of having the United States declare China a currency manipulator a few days later.

Now, in the run-up to next week’s G20 summit in Toronto, China is telling the world it does not want to discuss its currency, known as the yuan or the renminbi.

“I don’t think it is an issue that should be discussed internationally,” Cui Tiankai, a Chinese vice minister who is in charge of preparing for the G20 summit, told reporters.

Morris Goldstein, a senior fellow at the Peterson Institute for International Economics, called that “absolutely outrageous, outrageous intimidation” on China’s part.

“Where should we be discussing it if not at the G20? At the World Cup?” Goldstein said.

After giving China a 75-day “grace period,” the Obama administration will be hard-pressed not to formally label China a currency manipulator if Beijing does not move soon after the G20 summit, Fred Bergsten, president of the Peterson Institute, said at a briefing.

CONGRESSIONAL PRESSURE

Geithner has resisted setting a new release date for the delayed currency report, but told the Senate Finance Committee last week the Treasury Department would revisit the issue after the G20 summit.

Since a G20 finance ministers meeting earlier this month in South Korea, Geithner has taken a stronger tone on China’s currency, saying it was important for China to know that Congress would act if it did not.

A group of senators led by Charles Schumer of New York are threatening to pass legislation that would put more pressure on China to revalue the yuan by requiring the Commerce Department to act against “fundamentally misaligned” currencies.

A spokeswoman for Senate Majority Leader Harry Reid said on Friday the Senate could vote on that bill in the next several weeks.

House Ways and Means Committee Chairman Sander Levin also has signaled his intention to move legislation if China does not revalue its currency and the Obama administration then refuses to label them a manipulator and lay out a convincing course of action to pressure Beijing.

However, to some degree, China has been a victim of bad timing on the currency issue.

Many believe it was prepared to move in May, but scuttled those plans after the sovereign debt crisis in Europe jeopardized its number one export market.

“A couple of months ago it looked more probable that China would make a revaluation,” said Frank Vargo, vice president at the National Association of Manufacturers.

But after the European crisis, Chinese leaders apparently threw that possibility “into the trash can,” Vargo said.

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