Senate Committee Challenges Snow over China's Currency

By Elizabeth Kelleher
Washington File Staff Writer

Washington - Secretary of the Treasury John Snow said May 18 he was in “heated agreement” with Congress in its concerns about China’s currency policy.

As members of the Senate Banking Committee expressed frustration with the administration for not labeling China a “currency manipulator” in a recent report to Congress, Snow agreed that China’s efforts to float its currency have been “baby steps,” but he said the Chinese government did not meet the test of “intent” (to gain unfair competitive advantage) as set out in the Trade Act.

The Omnibus Trade and Competitiveness Act of 1988 requires the Treasury secretary to provide Congress with a report on exchange rate policy every six months.  A “manipulator” designation would trigger the administration to enter into serious negotiations with the other country.

Elizabeth Dole, a Republican from North Carolina, said she is “greatly disappointed” by the failure to recognize China as a currency manipulator, while Paul Sarbanes, the ranking Democrat on the committee, said the fact that China has not let its currency float has fueled the “largest bilateral trade deficit between any two countries in history.”  He said the trade deficit with China has gone from $70 billion in 2000 to $220 billion in 2006.

Currencies of Taiwan, South Korea, Japan and Europe have risen from 10 percent to 40 percent in the past four years, but China’s yuan has risen only 0.2 percent in the same time frame, according to data from the Federal Reserve System that was cited by Sarbanes.

Snow said recent verbal commitments expressed by Chinese President Hu Jintao to develop its domestic consumption market (in part by lowering taxes) and to reduce its trade surplus with the United States by allowing more foreign investment influenced the administration’s decision.

Snow also cited the fact that analysts at the financial management and services firm J.P. Morgan expect movement in the Chinese currency in the next 12 months and that China entered into an agreement with the Chicago Mercantile Exchange to allow hedging on the currency.  “You wouldn’t allow hedging without expecting movement,” Snow said.

Snow said he believes that China is more likely to allow its currency to fluctuate through quiet diplomacy than threats.

“If I were them, I wouldn’t think we’re serious,” said Debbie Stabenow, a Democrat from Michigan. (See related article.)

The full text of Snow’s prepared testimony to the Senate Banking Committee is available on the Treasury Web site.