Taunted by a new piece of legislation currently under consideration by the US Senate entitled ‘Currency Exchange Rate Reform Act of 2011’, China has expressed its displeasure in very strong terms. According to Reuters, the Senate will conduct a full week of debate on the bill, which will enable the US Government to impose countervailing duties on the products of countries where exports are being effectively subsidised by an undervalued exchange rate. Ahead of next year’s Presidential election, and with the economy still unable to generate much in the way of new jobs, it was always likely that this issue would be wheeled out by politicians keen to transfer the blame for the jobless recovery elsewhere.
Beijing’s response has been exhortative, claiming that the measure violates WTO rules and that an appreciating yuan at this time would only further weaken an already fragile global economy. In expressing their “adamant opposition” to the bill, China suggested that it had the potential to trigger a trade war between the two superpowers, and that forcing it to revalue would not resolve America’s large trade deficit nor its high unemployment rate. Recently, the yuan has actually appreciated against the dollar, at a time when the greenback has made significant gains against virtually every other major currency. As a result, the yuan has appreciated markedly against many of its Asian competitors.
Although the bill will probably clear the Senate, it may struggle to get through the House, because the leadership has not shown a great willingness to pursue it. Also, the Obama Administration has generally played a straight bat on the question of China’s yuan policy, although last year it did join forces with the yuan hawks for a time.
It is likely that this issue will get more air-time over the next year, but at the same time it is doubtful that it will really impact on how China manages its exchange rate. America may be impatient, but China holds the aces, and moreover, absolutely understands that it needs to move towards a more market-determined exchange rate.