Treasury Secretary Timothy F. Geithner said China needs to allow a “significant, sustained” rise in its currency as lawmakers called for the U.S. to toughen its stance on the yuan.
“The pace of appreciation has been too slow and the extent of appreciation too limited,” Geithner said in testimony at a congressional hearing today. “We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”
Geithner’s comments, his strongest since he took office in January 2009, highlight growing frustration among American officials with policies they say put American companies at a competitive disadvantage. The U.S. yesterday filed a pair of complaints against its second-largest trading partner with the World Trade Organization, and lawmakers facing elections in November are introducing measures allowing companies to pursue sanctions against China for its currency stance.
“The Treasury secretary looks like he is turning up the volume on his request for action from Chinese monetary officials,” said Chris Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ Ltd. in New York. “Politics in Washington is playing a role as Congress is looking for progress ahead of the midterm elections.”
The yuan rose to the strongest level since 1993 on speculation the authorities will permit faster gains in response to pressure from the U.S.
The currency climbed 0.26 percent to close at 6.7248 per dollar in Shanghai, its biggest advance since June 21, according to the China Foreign Exchange Trade System. It touched 6.7242, the strongest level since the central bank unified official and market exchange rates at the end of 1993.
“There is no question that China manipulates its currency in order to subsidize Chinese exports,” said Senator Richard Shelby of Alabama, the top Republican on the banking panel. “The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?”
The yuan has strengthened 0.9 percent in the past six days, taking its gain since a two-year peg ended in June to 1.4 percent. Twelve-month non-deliverable forwards climbed 0.3 percent to 6.6428 per dollar, reflecting bets the currency will rise 1.2 percent from the spot rate.
China on June 19 announced that it would allow greater flexibility in its exchange rate, which Geithner called a “very important step.”
In his testimony, Geithner renewed calls on countries with trade surpluses, such as Japan and Germany, to increase domestic demand and rely less on exports. He didn’t refer to Japan’s decision to intervene in the currency market yesterday, which House Ways and Means Committee Chairman Sander Levin called “deeply disturbing.”
The secretary is slated to testify twice today, before the Senate Banking Committee and Levin’s panel.
Geithner, 49, said the Obama administration would step up its efforts to urge the Chinese to loosen restrictions on the currency that make the nation’s exports cheaper in overseas markets. Geithner said “heavy intervention” keeps the yuan undervalued and China’s action will be taken into account when the Treasury prepares its next foreign exchange report, due in October.
In June, the U.S. stopped short of branding China a currency manipulator in a report that was originally due in April. Such a designation could lead to sanctions against China.
China surpassed Japan as the world’s second-largest economy last quarter. The U.S. trade deficit with China reached $119 billion in the first half of 2010, putting it on a course to exceed last year’s total of $227 billion.
“The United States is right to be frustrated with the rate of appreciation and the way that the renminbi has not appreciated since June,” said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington and a former Geithner adviser.
China may be using its exchange rate to handle the aftermath of the global crisis in ways that could help the U.S., said Stephen Roach, chairman of Morgan Stanley Asia, in an e- mail. He said China is moving cautiously while doing its “fair share” of righting lopsided global trade and investment flows.
“In a fragile post-crisis era, there is nothing wrong with China relying on a currency anchor as a linchpin of financial stability,” Roach said. “As much as Washington politicians would want China to help the U.S. devalue its way back into economic prosperity, that approach is bound to fail in an era of huge budget deficits.”
Geithner said China’s currency stance has created a “major distortion” in the global economy that is having a “negative impact” on the U.S. He said appreciation of the yuan would help with economic rebalancing, while not erasing the U.S. trade deficit with China.
He called on China to adjust its exchange rate and make a slate of other structural reforms to policies on interest rates, energy prices and service-sector investment. Geithner pledged the U.S. would “aggressively” pursue trade remedies, such as yesterday’s WTO complaints on electronic payment services and steel exports.
Geithner also said the U.S. is committed to “restoring fiscal sustainability” and reining in its long-term budget deficits.
Paul Krugman, a Nobel-prize winning Princeton University economist, has said China’s currency practices helped push the yen to rise to this week’s 15-year high against the dollar, prompting Japan to intervene unilaterally to weaken its currency on Sept. 15 for the first time since 2004.
Truman said Japan might be able to avoid the need for such actions by joining the U.S. efforts to persuade the Chinese to allow the yuan to appreciate.
In a hearing yesterday, Representative Tim Ryan, an Ohio Democrat and co-sponsor of legislation letting companies seek duties on Chinese imports, said China is violating trade laws and the bill would give the U.S. tools to combat undervalued currencies.
“It’s now time for our country to have the guts to stand up and take a strong stand against China’s currency manipulation,” Ryan said in testimony to the House Ways and Means Committee.
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