U.S. Inaction on China Currency Stirs Senate Action

June 13, 2007 Updated: June 13, 2007

WASHINGTON—Four U.S. senators unveiled a tough bill on Wednesday meant to force China to let its currency rise in value, after the U.S. Treasury declined to brand the “undervalued” yuan a deliberate trade ploy.

U.S. lawmakers' anger at what many decry as a policy by China to keep the value of its yuan artificially low and make its products cheap for American consumers led the senators to introduce legislation to ensure action is taken against countries with “fundamentally misaligned” currencies.

By setting out remedies up to and including potential coordinated currency intervention by the Federal Reserve and other central banks, the Senate proposal represents a rejection of Treasury Secretary Henry Paulson's efforts to get China to change through persuasion, not legislation.

In July 2005, China abandoned a decade-long policy of holding the value of the yuan, or RMB, fixed against the U.S. dollar, revaluing it by 2.1 percent. Since then, however, it has risen only about another 6 percent.

Treasury admitted China's currency was “undervalued” but said it was “unable to determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.”

That position was scoffed at by Senate proponents of a bill that would help identify “fundamentally misaligned” currencies and categorize them as either generally misaligned or specially deserving of “priority action” that could bring more pressure against them.

The legislation was crafted by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, Sen. Charles Grassley, an Iowa Republican, Sen. Charles Schumer, a New York Democrat, and Sen. Lindsey Graham, a South Carolina Republican, who pledged last year to pursue a tough bill to pressure China without violating World Trade Organization rules.

For nations labeled as a priority country, the legislation would require the U.S. Treasury to immediately seek advice from the International Monetary Fund and key trading partners on how best to address the issue.

Grassley called it “a velvet glove with a steel fist inside” and Baucus said he intended to move the legislation forward swiftly and have it ready for a vote by September.

“This will be a very broadly supported bill,” Baucus said. “This is the real deal.”

Treasury also would be required to oppose any favorable change in IMF governance practices for a targeted country, while the Commerce Department would have to take the targeted country's currency practices into consideration when deciding whether it qualifies as a “market economy” under U.S. anti-dumping laws.

China has asked to be considered a market economy, believing that would lead to lower U.S. anti-dumping duties. Penalties increase if a targeted country has failed to adopt “appropriate policies” after six months.

Paulson, who took over Treasury last year, has been trying to persuade Chinese officials that they need to let their currency appreciate more rapidly because protectionist sentiment was on the rise in Congress. The Treasury report pledged to continue to push Beijing on the currency issue.

“Treasury forcefully raises the Chinese exchange rate regime with Chinese authorities at every available opportunity and will continue to do so,” the report said.

“China should not hesitate any longer to take far more vigorous action to rebalance its economy, promote immediate RMB movement to tackle the currency's undervaluation, and achieve far greater flexibility in the exchange rate regime,” it said.