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China’s Currency Manipulation and Legislative Initiatives

China’s Currency Manipulation and Legislative Initiatives. Robert B. Cassidy Director International Trade and Services. The Important Questions . Does China manipulate its currency? Is the Yuan undervalued? Does it’s undervalued currency hurt the United States?

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China’s Currency Manipulation and Legislative Initiatives

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  1. China’s Currency Manipulation and Legislative Initiatives Robert B. Cassidy Director International Trade and Services

  2. The Important Questions • Does China manipulate its currency? • Is the Yuan undervalued? • Does it’s undervalued currency hurt the United States? • Does China’s manipulation help China? • What do the various legislative initiatives do to correct the problem?

  3. #1: Does China Manipulate the Exchange Rate for the Yuan • 1994: China unified its dual exchange rate and depreciated it by 50% • China has fixed its exchange rate at 8.28 yuan/dollar since 1995 • Exporters exchange dollars for yuan from the SAFE and at no other exchange rate.

  4. #1: Does China Manipulate the Exchange Rate for the Yuan • Fixed exchange rate does not violate WTO or IMF rules • Violates WTO rules when exchange rate frustrates the intent of the WTO agreements. • Violates IMF rules when a country manipulates its exchange rate to gain an unfair competitive advantage.

  5. #2 Is the Yuan undervalued?

  6. Chinese Trade Data Incorrect

  7. Chinese Trade Data Incorrect

  8. #2 Is the Yuan Undervalued • NAM has argued that Yuan is undervalued by 40% • Undervalued currency is an export subsidy and a surtax on U.S. exports • Since Asian financial crisis, other Asian countries have pegged their exchange rates to the yuan/dollar. • China is the most egregious but an overall Asian problem

  9. #3 Does the undervalued yuan hurt the United States?

  10. #3 Does the undervalued yuan hurt the United States? • Trade deficit for 2004 was 162 billion, highest bilateral trade deficit • Undervalued currency a tax on U.S exports • A subsidy on Chinese exports to the U.S. • Foreign exchange reserves over $600 billion, 80% held in U.S. dollar reserves • Foreign investment is cheap in China • Speculative flows increasing as rumors spread

  11. #3 Does the undervalued yuan hurt the United States? • NAM estimates that U.S. manufacturing has suffered • 60% of imports from China displace U.S. production; 40% at expense of other suppliers • Price pressure on domestic suppliers • Manufacturing jobs declined by 2.8 mil since 2001

  12. #4 Does manipulation help China?

  13. #4 Does China’s Exchange Rate Manipulation Help China? • Foreign direct investment in China exceed $60 billion, second only to US • Economy growing at 9.5% • China needs to create 15-25 million jobs • Hurts China in long run: • Overheated economy • Inflation increases

  14. #5 What is Congress Doing? • Schumer/Graham (S. 295): Authorizes negotiations on currency and if not successful, apply 27.5 % import duty • Stabenow (S. 14): Apply 27.5% import duty if China doesn’t revalue yuan • Collins/Bayh (S. 593): Provisions on countervailing duties apply to non-market economy countries (e.g., China) • Lieberman: Requires negotiation and appropriate action against currency manipulation

  15. #5 What is Congress Doing? • Sanders (H.R. 728): Withdraw normal trade relations treatment. • English (H.R.1216): Apply countervailing duties against non-market economy countries (e.g., China) • Ryan/Hunter (H.R. 1498):Exchange rate manipulation subject to countervailing duties and China safeguard actions

  16. Status of Legislation • Schumer’s bill will be voted on by August • Bayh/Collins will have hearing in Finance Committee • Ryan/Hunter has 60+ co-sponsors • Because of defense provisions, has dual oversight • English has 34 co-sponsors; referred to Ways and Means Committee

  17. Exchange Rate Scenarios • IMF proposal: • Move to more flexible exchange rate (appreciation) • Drop hard peg; move to basket of currencies • Broaden the band from the current 1% • Treasury: adopt floating exchange rate • Capital markets still closed and weak • Danger that currency will depreciate • CCC: Appreciate by 40% but maintain peg • Basket and broader band acceptable but not priority

  18. Possible Revaluation Scenarios • Market predicting small appreciation (5-8%), a wider band (only 1% currently); and based on a basket of currencies. • May be too modest to result in significant adjustment

  19. What’s next? • Pressure mounting on euro and other market determined currencies • U.S. under pressure to reduce twin deficits. • Imbalances becoming more extreme • Search for a soft landing: • Pressure on China to realign • Multilateral accord similar to Plaza Accord

  20. Lessons learned • China does not move unless forced to move • China understands and respects power • Failure to use it; lose it • China will threaten and bluster • Important to stand firm and defend U.S. interests.

  21. Robert B. Cassidy Collier Shannon Scott 3050 K St. NW Washington DC 20007 202-342-8400

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