RISK MANAGEMENT
Washington Watch: Yuan Revalued
September 6, 2007
Michael Griffith, AFP and Thomas Santos, AFP

Since January, when the Democratic-led 110th Congress convened, Congress has stepped up pressure on China to address currency valuation concerns. Many lawmakers on both sides of the aisle are concerned about the effect the misaligned yuan has on U.S. manufacturers' ability to compete against their Chinese counterparts. The profound difference in value has many in Congress are alleging that the Chinese government is intentionally manipulating its currency to the detriment of U.S. companies, therefore, several members of Congress have introduced legislation intended to address the trade deficit and currency issue. In addition to legislation, several hearings have been held.

While Congress is pursuing legislative options, the Bush Administration is taking a vigorous diplomatic approach to persuade the Chinese government to rapidly revalue its currency. The main platform for this has been the Strategic Economic Dialogue (SED), a series of talks between the United States and China intended to address several trade related issues and maximize the benefits of an increasingly important economic relationship. Treasury Secretary Henry Paulson has led the talks with Chinese Vice Premiere Wu Yi since their inception last year. The first round of talks, held during the 110th Congress, were hosted in Washington, D.C. in May. The May talks produced a few minor gains, particularly in the financial services industry. However, these gains were not nearly sufficient for detractors in Congress who were looking for either a significant revaluation or a solid plan for moving the yuan towards a market-driven currency, rather than having its value based on a floating peg.

In reaction to the lack of progress resulting from the SED and Secretary Paulson's refusal to declare that the Chinese government a currency manipulator, the Senate Finance Committee and the Senate Banking Committee have approved separate bills (S. 1607 and S. 1677 respectively) to address the issue with strong, bi-partisan majorities. Both bills seek to overcome the "intent" standard in the current law governing foreign exchange. As the law stands today, the treasury secretary has a number of tools he or she can use to address the currency issue. However, the secretary must deem that a country is intentionally manipulating its currency. In June, Treasury Secretary Paulson, in his report to Congress on International Economic and Exchange Rate Policies, declared the yuan to be "fundamentally misaligned" against the dollar, but did not find intent on behalf of the Chinese to manipulate the currency.

While both bills are designed to be WTO-compliant, the Bush Administration opposes Congressional action on the matter, arguing Congress is undercutting their diplomatic efforts to persuade China to act. In an effort to demonstrate the Administration's wish to see results more quickly, Secretary Paulson left for China to continue the SED the same week that the Senate Finance Committee and Senate Banking Committee approved their bills. Paulson's trip is significant because it had not previously been scheduled and comes only two months after the last round of meetings and four months ahead of the next session, scheduled for December.

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