AWPA Wireline - June 2004

The Fair Currency Alliance has held several meetings with key Administration officials on progress in talks with the Chinese government to reform its currency practices and revalue the yuan. After the Administration signaled that it would not accept the Section 301 case prepared by the Alliance, the group held a press conference and outlined its plan to move ahead by engaging the Administration through a series of meetings with Treasury officials, and working with members of Congress to see that the Administration and the Chinese government understand the concerns of many US companies and workers that the undervaluation of the Chinese currency is having an adverse impact on US production, exports, and jobs.

Commenting on the Section 301 petition, Treasury Secretary Snow said the Administration believed that good progress was being made with the Chinese through various consultative mechanisms and that a Section 301 case would not, in their view, be helpful. The Administration also rejected an AFL-CIO petition against China's labor practices.

The USTR added that China is very interested in receiving market economy status, which generally would lower antidumping duties on Chinese imports in the event that it loses antidumping cases in the US. Ambassador Zoellick noted that two of the six criteria China is required to meet to be designated as a market economy are the extent to which the currency of China is convertible and the extent to which wage rates are determined by free bargaining between labor and management. "These criteria, together with China's strong interest in being recognized as a market economy under US laws, provide us with significant leverage on labor, currency, subsidy and other issues," he concluded.

On the legislative front, Rep. Mike Rogers (R-MI) stated that he will ask the General Accounting Office (GAO) to conduct a formal study that would put China's trade balance reports under a microscope to determine if the numbers being reported are accurate. Rogers says a GAO study will show that while China cites data showing only a small global trade surplus as justification for maintaining its current fixed exchange rate policy, analysis of China's trading partner data indicates that China's global trade surplus is considerably higher and growing.

Beijing is spending more than $30 billion on new subways, road construction and glittering stadiums in preparation for the 2008 Olympic Games. However, there is not enough steel to meet the country's demand. A supply crunch has sent prices soaring around the world. In early April, that prompted the Beijing Organizing Committee for the Olympic Games to cut steel use in the planned National Stadium, the Games' primary venue, by about 40%, to 45,000 tons, using other construction materials instead.

Many economists agree that the system is clearly out of whack. China is certainly regarded as a country with first-world manufacturing prowess. But that industrial might is hitched to a broken, third-world financial system. And because it is so big, an overheated China takes on enormous global importance. If the Chinese run into trouble, they will create significant problems for Southeast Asian economies, for Japan, and the US. In the short term, China's ability to disrupt the world economy is growing to scary proportions.

Chinese authorities are clearly getting nervous. Beijing has raised bank reserve requirements for the second time in eight months, and a sell-off in Chinese bonds has been accelerating. With the yuan under considerable speculative pressure, Chinese leaders are signaling that it might be time for the central bank to loosen its fixed-currency regime slightly to stem inflation and slow the economy. The markets seem to be taking such talk seriously. The one-year forward rate on the yuan is hovering at 7.8 to the dollar, suggesting a future adjustment in the currency.

China is also devouring 7% of the world's oil supply, a quarter of all of its aluminum, 30% of iron-ore output, 31% of the world's coal, and 27% of all steel products.