China warns of trade war if U.S. bill passes

An angry China warned Washington on Tuesday that passage of a bill aimed at forcing Beijing to let its currency rise could lead to a trade war between the world's top two economies.

China's central bank and the ministries of commerce and foreign affairs accused Washington of "politicising" currency issues and putting the global economy at risk after U.S. senators voted on Monday to start a week of debate on the bill.

The response suggested China sees a greater risk from the proposed bill than it has in the past when U.S. lawmakers attempted to put forward similar legislation to speed up the pace of appreciation in the yuan, or renminbi.

Beijing made similar remarks last year after the House of Representatives passed a currency bill that later failed to make any further progress in Congress.

Tuesday's coordinated salvo and the central bank's warning of a trade war and a slowdown in China's exchange rate reforms indicated Beijing was taking the latest currency bill more seriously.

"It is very rare for three different ministries of the country to refute something so quickly and strongly, showing how deeply the Chinese government is concerned about the yuan bill," said Wang Zihong, a researcher at the China Academy of Social Sciences, a top government think tank.

"The strong responses made by the Chinese government may also suggest that the possibility would be quite high this time that the United States will pass the final bill in the end and that Beijing is worried about the possible negative impact on China's exports resulting from the legislation," he said.

U.S. Senate vote opened a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidising their exports by undervaluing their currencies.

U.S. lawmakers, eyeing 2012 elections, said keeping China's currency undervalued had cost American jobs and that a fairer exchange rate would help cut an annual trade gap Washington puts at more than $250 billion.

"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website (www.gov.cn) on Tuesday.

"China expresses its adamant opposition to this."

Ma urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism."

He repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."

China's exchange rate has long been a bone of contention between Beijing and Washington. The yuan has appreciated some 30 percent against the dollar since it was revalued in 2005, although critics say it is still valued too low and gives Chinese exporters an unfair advantage.

The emergence of China as the world's fastest-growing major economy has led to often testy relations with the United States. The most recent tension was over U.S. plans for a $5.3 billion upgrade of the F-16 A/B fighter fleet of Taiwan, which Beijing considers to be a breakaway province.

Can The Bill Pass?

Monday's vote bolsters prospects for the bill to clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky.

If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," said Senate Majority Leader Harry Reid.

China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame.

"It is widely understood that the renminbi exchange rate is not the cause of China-U.S. trade imbalances," Ma said.

China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.

"The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see."

Ma said Beijing would continue "proactive" and "gradual" reform of the currency and the central bank added Chinese inflation had already pushed the real yuan exchange rate further "toward the equilibrium."

Ministry of Commerce spokesman Shen Danyang said the United States was trying to pass on the blame for its own failings.

"Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern," he said in a statement issued on the ministry's website.

The Senate move had to be viewed in the context of deepening economic and political uncertainties in the United States, as well as dwindling approval ratings ahead of next year's elections, the state news agency Xinhua said in a commentary.

"U.S. politicians are using the pretext of creating jobs and playing the China currency card -- the practice of diverting attention from domestic conflicts has almost become a political convention in recent years," it said.

Trade War

Shen said any move by the United States to force the yuan to appreciate would undermine joint efforts to revive global economic growth, which took another blow on Monday with data showing that global manufacturing shrank in September for the first time in over two years.

"It will weaken China-U.S. efforts to join hands and together promote global economic recovery," he said. "The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment."

U.S. critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.

A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.

However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.

As with similar legislation in the past, the Obama administration has not taken a public stance on the bill, although White House spokesman Jay Carney said on Monday that the president shares "the goal it represents."

The Senate decision was a sign that China was being made a scapegoat by struggling western economies, said Wang Jun, researcher at the China Center for International Economic Exchanges.

"Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue.

"We need to launch some pre-emptive measures to hit back against any more attacks," Wang said.

[Source: By David Stanway and Aileen Wang, Reuters, Beijing, 04Oct11]

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