U.S. Pass on China Currency Stirs Senate Action

Four U.S. senators unveiled a long-awaited bill on Wednesday boosting pressure on China to let its currency rise in value after the U.S. Treasury declined to brand the "undervalued" yuan a deliberate trade ploy.

The bill reflects growing frustration in Congress over the huge U.S. trade deficit with China, which hit a record $233 billion in 2006. Many lawmakers believe China's currency practices contribute to the deficit by giving Chinese companies an unfair price advantage in trade.

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.

The bill also potentially allows U.S. companies to seek anti-dumping duties on Chinese goods to offset the price advantage of Beijing's currency policies.

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.

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

Treasury noted 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."

Schumer called that decision "mind-boggling," while Baucus said it showed U.S. currency policy was badly outdated and needed the overhaul the senators have proposed.

The bill would require Treasury to develop a new semi-annual report to determine whether a country's currency is "fundamentally misaligned," regardless of intent.

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.

It also requires Treasury to oppose any favorable change in IMF governance practices for a targeted country and orders the Commerce Department to take the targeted country's currency practices into consideration when deciding if 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, which are imposed on foreign goods sold below "fair market" value.

After six months, the bill ratchets up the pressure on countries with misaligned currencies by imposing additional penalties. Those include allowing U.S. companies to seek anti-dumping duties against the country's currency practices, something they can not do now.

If the country has not reformed its currency practices after a year, the U.S. Trade Representative's office would be required to initiate a currency case at the WTO.

The Treasury Department also would be required to consult with the Federal Reserve and other central banks on possible "remedial intervention in currency markets" against the targeted country.

"(The bill) gives a good chance for self-correction before penalties ramp up. It's a velvet glove with a steel fist inside," said Grassley. "This will be a very broadly supported bill," said Baucus, who told reporters it could be on the Senate floor for a vote by September. "This is the real deal."

Meanwhile, Schumer predicted the legislation would pass both the Senate and the House of Representatives with a large enough margin to protect it against a presidential veto.

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.

Treasury officials said they were still studying the bill. Paulson, who got a telephone briefing on Wednesday on the legislation, has previously said Treasury has all the tools it needs to press China on the currency reform.