October 5, 2011
U.S.-China Trade War: Congress Beware What You Wish For

by Yukon Huang

Once again the US Congress is finding it more convenient to play the China currency card as the panacea for America's economic woes, rather than deal with the difficult issues in President Barack Obama's recent employment bill.

China's response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from the problems in the eurozone and the US, China's leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral co-operation. The country's government sees the currency debate as yet another sign of why the American political system is broken.

Many within China thought that given recent developments, criticism of its exchange rate policies would become more muted. After all, China has continued its policy of gradual appreciation of 5-6 six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. China also notes that its trade surplus has declined sharply from 7 per cent to 8 per cent of gross domestic product five years ago to a projected 1-2 per cent for this year. And while reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.

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