China left no doubt Wednesday as to what it thought of a new U.S. Senate bill aimed at forcing Beijing to strengthen the value of its currency: The Central Bank devalued it as much as it could.
The bill, passed Tuesday evening, “will not solve U.S. economic and employment problems and will only disturb … efforts to promote world economic recovery,” said Chinese Foreign Ministry spokesman Ma Zhaoxu in a statement.
Reflecting growing anger in the U.S. about the loss of jobs to China, the Senate passed a bill that would punish countries that subsidize their exports by maintaining an artificially low exchange rate. Washington has long been pressing Beijing to let its currency rise, making U.S. goods cheaper in China and thus helping U.S. exports.
Administration officials say they support the bill’s goals but worry that it might violate U.S. obligations under World Trade Organization rules. The bill is not expected to pass the House of Representatives, where Speaker John Boehner has called the legislation “dangerous.”
China: Exchange rate is not the problem
In a research paper published Wednesday, the Chinese Central Bank insisted that the Chinese currency, the yuan, “is gradually approaching a reasonable and balanced level.” In a managed process, the bank has strengthened the yuan by 30 percent since 2005, but this has not prevented the U.S. trade deficit with China from widening.
“The yuan exchange rate is not the major reason for the trade imbalance” with the U.S., argued the paper, adding that “politicizing the exchange rate will not solve the savings insufficiencies, trade deficit, and high unemployment in the U.S.”
Underlining its “firm opposition” to the Senate vote, the Central Bank guided its currency 0.5 percent below its daily reference rate Wednesday, the maximum devaluation possible in one day under rules governing the exchange rate.
Chinese officials have warned that the protectionist moves the Senate bill would require, such as countervailing U.S. duties on Chinese imports benefiting from an artificially low yuan, would provoke retaliation.
A trade war?
“Should the proposed legislation be made into law, the result would be a trade war between China and the U.S. and that would be a lose-lose situation for both sides,” Deputy Foreign Minister Cui Tiankai told reporters earlier this week.
Chinese economists say Beijing is reluctant to allow more than a gradual strengthening of the yuan for fear of putting export-oriented Chinese companies out of business and their workers out of a job.
Rising unemployment would threaten social unrest that would scare the government into more conservative economic policies, suggests Lu Zhengwei, chief economist at the Industrial Bank Co. in Shanghai.
“That would derail the structural adjustment” the authorities must implement to solve the exchange rate problem once and for all, basing China’s economic growth on domestic consumption, not on exports, says Lu. Even in the best of cases “this project will take several years,” he warns.
Peter Ford is a staff writer for the Christian Science Monitor.