Treasury Secretary Pressed by Congress on China's Exchange Rates

By Elizabeth Kelleher
Washington File Staff Writer

Washington – U.S. Treasury Secretary John Snow responded to congressional concerns about China’s economic policies May 17 by citing the Bush administration’s ongoing efforts to “enlighten [the Chinese] to their own best interest,” and rejected worries over China’s holding of U.S. Treasury securities, calling such investments a vote of confidence in the U.S.”

Snow’s comments came in testimony before the House Committee on Financial Services.

Republicans and Democrats on the panel expressed disappointment that the Treasury Department did not label China a “currency manipulator” in a report to Congress. (See related article.)

Representative Robert Ney, a Republican from Ohio, told Snow that China is not making enough progress in making its currency flexible.  He called the 1.3 percent appreciation in the currency since 2005 minor and said that China’s exchange-rate policies take jobs from U.S. industrial workers.

Snow told the panel that, during an April visit to Washington by Chinese President Hu Jintao, the Bush administration encouraged Hu to stop “suppressing exchange rates.”  Controlling the currency, Snow said, results in faulty “price signals.”

He said those signals could make producers believe they are the best in the world market when that may not be the case and added that currency flexibility in China would free resources from “less-efficient uses,” redirect them to “productive uses” and increase the size of total world output.

The administration is committed to continuing to “enlighten [the Chinese] to their own best interest,” Snow said.

Some congressmen expressed concern over Japanese and Chinese holdings of U.S. Treasury securities.  Representative Carolyn Maloney, a Democrat of New York, said China’s holdings of Treasury securities increased 423 percent since 2001 and that much of that investment was from China’s central bank “to keep its own currency stable.”  She said a large international debtor could harm the U.S. standard of living in the future.

Snow took exception to that statement, saying that, even though China’s holdings of Treasury securities had increased dramatically since 2001, its total share remained under 8 percent.  Furthermore, he said, foreigners invest in the United States because it offers the best risk-adjusted returns investors can get.  “It’s a vote of confidence in the U.S.,” he said.

The secretary also said China and India should loosen rules to allow foreign direct investment and ownership of insurance companies, banks and retailers.  On May 16, Senator Charles Schumer, a Democrat from New York, said he wants Snow to press China much harder to open up its financial services sector.  Schumer said that he was “disappointed” over an apparent decision by the Chinese government to block Citigroup Inc. from buying a majority stake in Guangdong Development Bank in China.

The full text of Snow’s prepared testimony, as submitted to the committee, is available on the Treasury Department’s Web site.

For additional information on U.S. policy, see The United States and China.