The Bush administration said Thursday that China (search) should "move without delay" to change currency practices that American manufacturers blame for soaring trade deficits and the loss of U.S. jobs.
Facing heavy criticism for the failure to cite China last week as a currency manipulator, Treasury Secretary John Snow (search) told the Senate Banking Committee that the administration's nearly two-year effort to pressure China to stop pegging its currency tightly to the U.S. dollar was showing results.
He said the Chinese had now taken all the steps needed to prepare their financial system for the move to a more flexible currency.
"China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," Snow said in his prepared testimony.
Snow repeated a warning made in last week's currency report: China could be cited by the United States as a currency manipulator, a process that could lead to economic sanctions, if it does not act soon.
"If current trends continue without substantial alteration, China's policies will likely meet the technical requirements of the statute for designation," Snow said.
Both Democrats and Republicans on the committee expressed exasperation with China's current policies and pressed Snow to define what China would need to do to avoid being branded as a currency manipulator when the next Treasury report is due in October.
"Many of us see this as approaching a crisis status," Sen. Paul Sarbanes, D-Md., told Snow. Sarbanes said he was disturbed by reports that China might end up allowing its currency to rise by as little as 5 percent in value against the dollar. That would do little to make a dent in America's huge trade deficit with China, he said.
Snow refused to say how much of a revaluation of China's currency against the U.S. dollar would be sufficient, but he said the adjustment would have to be large enough that it would "significantly close the gap" between the current value of the yuan (search) and a "more appropriate value" against the dollar.
The administration's tougher approach to China is coming at a time when it is scrambling for votes to win congressional passage of a new free trade agreement with Latin American nations -- the Central American Free Trade Agreement (search).
The administration has moved to re-impose quotas on a flood of Chinese imports of clothing and textile into the United States in response to pleas from U.S. manufacturers and has also increased pressure on China to halt rampant piracy of U.S. movies, music and computer software.
Snow told senators that he believed that China would move to introduce more flexibility before the next Treasury report is due in October.
"I fully anticipate that before our return, before we conclude the next report, we will have seen the sort of action that we are calling for," Snow said.
However, the Chinese so far have refused to set a timetable for when they might move to a more flexible currency system.
The administration has faced heavy criticism for its failure to cite China last week in a report that it is required to present to Congress twice a year.
The pressure to designate China has grown as America's trade deficit with that country has soared to all-time highs, hitting $162 billion last year out of a total U.S. trade deficit of $617 billion, also a record.
American manufacturers contend that China's decade-long practice of keeping its currency valued at around 8.28 yuan to the dollar, has resulted in the Chinese currency being undervalued by as much as 40 percent, giving the Chinese a huge competitive advantage.
A cheaper Chinese currency makes Chinese goods cheaper for American consumers and U.S. products more expensive for Chinese consumers.
Legislation has been introduced in both the Senate and the House to impose across-the-board tariffs of 27.5 percent if China does not act to change its currency policies.
Snow made clear in his testimony that the administration was not insisting that China move immediately to a currency whose value was set totally in global currency markets, a practice known as floating.
"We are not calling for an immediate full float with fully liberalized capital markets. This would be a mistake at this time -- China's banking sector is not prepared," Snow said. "What we are calling for is an intermediate step that reflects underlying market conditions and allows for a smooth transition -- when appropriate -- to a full float."
Outside experts have said China could stop linking its currency only to the U.S. dollar and instead peg it to several currencies or it could allow the yuan to trade in a band rather than keeping it pegged at 8.28 yuan for each dollar. That would allow the yuan to be revalued higher.