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26. April 2007

Yuan's value critical to livelihoods in China and the U.S.

WASHINGTON: When China allowed a small rise in the value of its currency in 2005, Wang Yuzhou, the president of Zhejiang Zhongda Newland, a food company in Hangzhou, saw his profits squeezed. Any further move now threatens the livelihoods of his 1,000 workers and the 5,000 rural households that supply his plants, he said.

In Lewisburg, Tennessee, John Walker said China's currency policies had already cost 100 jobs at his die-casting company. He wants the U.S. Congress to do "whatever it takes" to force an increase in an undervalued yuan that he contends gives an unfair advantage to Chinese competitors.

Wang's and Walker's interests collide next month when Treasury Secretary Henry Paulson and Deputy Prime Minister Wu Yi hold their next set of talks under a semiannual schedule set up last year. Without steps to allow a significant increase in the yuan, which most economists consider unlikely, Paulson may not be able to continue holding off moves in Congress to punish China.

"After years of talk and bluster, protectionism no longer seems like an empty threat," said Stephen Roach, chief global economist at Morgan Stanley in New York. "Trade sanctions against China are now all but inevitable."

Exports, which accounted for about 40 percent of China's economy last year, bring growth, jobs and stability that compel the nation's leaders to avoid any dramatic rise in the yuan, said Don Straszheim, vice chairman of Roth Capital Partners, based in Newport Beach, California.

"The weak currency is central to China's whole growth strategy," said Straszheim, who specializes in the Chinese economy. "They are going to take their chances and move as slowly as they possibly can."

China's textile industry said it loses 8.2 billion yuan, or $1.1 billion, of annual profit for each percentage point rise in the currency.

Until now, Paulson, 61, has demonstrated sympathy for China's predicament and has headed off sanctions with promises of slow but steady progress on yuan appreciation. That may no longer be possible with a weakened President George W. Bush, a new Congress controlled by Democrats and a presidential campaign already under way.

"Paulson has less space in which to maneuver," said Charlene Barshefsky, who was U.S. trade representative under President Bill Clinton.

Since China scrapped a fixed exchange rate in July 2005, the yuan has gained 7.2 percent against the dollar. It will rise 4 percent this year, projects Jan Lambregts, head of research at Rabobank International in Hong Kong.

U.S. lawmakers say that would not be enough. Two senators predicted March 28 that unless China allowed a significant increase, Congress would approve sanctions by next year.

"Strong and effective legislation is likely to pass with a veto-proof margin," said Senator Charles Schumer, a New York Democrat, who is co-sponsoring a sanctions bill with the South Carolina Republican Lindsey Graham. Overriding a presidential veto requires two-thirds majorities in both the Senate and House of Representatives.

"There is a clear sense of frustration with China in political circles and among industries around America," Paulson told the Committee of 100, a group of U.S. citizens of Chinese descent, in a speech April 20 in New York. "We and our Chinese counterparts are looking for tangible results," he said. "Time is of the essence."

Protectionist measures have already gone beyond threats. In March, the United States, alleging illegal subsidies, slapped duties on glossy paper from China, opening the way for textile producers, steelmakers and others to seek similar protections.

This month, Washington filed complaints at the World Trade Organization, alleging Chinese piracy of copyrighted movies, music, software and books. And the currency issue may provoke the most extreme measures yet.

Schumer's office cites analysis by Morris Goldstein at the Peterson Institute for International Economics in Washington. Goldstein estimates the yuan is 40 percent undervalued against the dollar and calls for an immediate 10 to 15 percent appreciation, followed by further increases.

"They cannot continue spitting in the ocean by doing these tiny little movements," said Goldstein. "They need to make a significant down payment to show they're serious about dealing with this problem."

Even that would not satisfy Walker, 54, president of Walker Die Casting. Low-priced Chinese castings are flooding the market and taking business from his firm, he said. Profits fell last year, forcing layoffs. Walker said he has told his congressman, Democrat Bart Gordon, that "at the very least, China needs to let its currency float to make it fair."

That's just what worries Wang, 45, of Zhejiang Zhongda Newland. He said the gradual appreciation of the yuan since 2005 contributed to a 5 percent drop in profits last year.

Any rapid rise in the yuan would erase our profits," said Wang, whose company exports 98 percent of the frozen fruits, vegetables and seafood it processes.

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