U.S. Increasing Pressure on Chinese Currency

The Bush administration is intensifying pressure on China (search) to revamp a currency system that critics blame for America's swollen trade deficit and the loss of U.S. factory jobs.

But it stopped short of branding the country a manipulator of currency, a move that could lead to economic sanctions.

That disappointed manufacturers, some Democratic and Republican lawmakers and others who contend China is intentionally keeping its currency artificially low to give Chinese companies a competitive edge in international trade.

The Treasury Department (search), however, as part of its twice-a-year report to Congress, 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 policies.

"They went right up to the door, but didn't knock," Sen. Charles Schumer (search), D-N.Y., complained in an interview. "Congress doesn't want any more talk, it wants action."

Schumer said Treasury's failure to designate China a currency manipulator will strengthen efforts by him, Sen. Lindsey Graham (search), R-S.C., and others to get Congress to impose hefty, 27.5 percent penalty tariffs on all Chinese imports unless China changes its currency system.

Over the last two years, the administration has been prodding China to stop linking its currency, the yuan, to the dollar. Other economic powers also have been calling for such a change.

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.

Separately, President Bush (search) 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.

A 1988 law requires the Treasury Department to analyze countries' exchange rate policies and determine whether manipulation to gain unfair trade advantages is occurring. A finding that a country has manipulated its currency could ultimately lead to sanctions.

"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.

Manufacturers have pushed for China to be designated a currency manipulator.

"If this isn't currency manipulation, then what else would ever qualify," said National Association of Manufacturers President John Engler.

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 largest deficit ever recorded with any country.

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 to Congress.

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 rise.

"It should be a real step," he said. "It should be something the world can see and know that China means business." He 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.

The China Foreign Exchange Trade Center (search), the central foreign exchange brokerage, on Wednesday began trading eight new foreign currency pairs — a reform that will not affect trading in the yuan or its value.

The new system pairs the U.S. dollar against seven other currencies: the euro, Australian dollar, British pound, Japanese yen, Canadian dollar, Swiss franc and Hong Kong dollar. The eighth new set pairs the euro with the Japanese yen.

Previously, trading by the center was only allowed between the yuan and four other currencies: the U.S. dollar, the Hong Kong dollar, Japanese yen and euro.