China warns US against taking tougher line over currency and trade policies

US TREASURY secretary Timothy Geithner yesterday sought to convince sceptical US lawmakers he was taking a tougher line on China’s currency and trade policies, but Beijing warned that pressure from Washington could backfire.

Striking his sharpest tone yet in what has long been a flashpoint in US-China relations, Mr Geithner told a Senate hearing the yuan was strengthening too slowly and the Obama administration was looking for ways to get Beijing to move faster.

Lawmakers weighing a tough new law to punish China for currency practices that they say keep the yuan artificially low grilled Mr Geithner over why he had held off formally branding China a “currency manipulator” and urged concrete action by the Obama administration.

But even as he talked tough, Mr Geithner sought to buy time for US diplomatic efforts with China, saying the United States would use a Group of 20 summit in Seoul in November to try to mobilise support for Chinese currency reform.

Mr Geithner’s testimony before the Senate banking committee could be critical to whether lawmakers, who say China’s practices hurt US jobs and corporate profits, decide to push ahead on legislation before November elections that are expected to hinge on voter concerns about the struggling economy.

“We share your frustration,” he said in the first of a pair of Capitol Hill appearances, though he tempered his remarks by saying China’s exchange rate policy does not pose a systemic risk. He did not elaborate on specific measures under consideration.

Mr Geithner pledged the US would “aggressively” pursue trade remedies, such as yesterday’s WTO complaints on electronic payment services and steel exports.

With the US jobless rate stuck near 10 per cent while China is again running up big trade surpluses, some analysts see chances for legislation as more likely now than at any time in the recent past.

But the prospects for bringing the issue to a vote before the November 2nd election are dimmed by the tight legislative timetable, with both chambers due to recess by mid-October to allow lawmakers return home to campaign.

“Congress might push a Bill, but my sense is this is largely rhetoric and political posturing designed primarily for a domestic audience,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. And China’s foreign ministry, signalling a reluctance to give in, said pressure over the yuan exchange rate “not only would fail to solve the problems; on the contrary, it could have the opposite effect”.

Mr Geithner said that China, whose yuan currency has risen only slightly against the dollar since Beijing announced the end to its currency peg in June, needs to do more. “China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces,” he said. It was unclear, however, whether his get-tough talk would be enough to overcome scepticism in Congress over the administration’s approach and head off a Bill that would slap punitive duties on Chinese goods.

Senate banking committee chairman Christopher Dodd told Mr Geithner the time for action was “long overdue”.

“China does basically whatever it wants while we grow weaker and they grow stronger. We clearly need concrete action here,” he said. Senator Richard Shelby, the committee’s most senior Republican, said, “There is no question that China manipulates its currency in order to subsidise its exports. The only question is: why is the administration protecting China by refusing to designate it as a currency manipulator?”

Mr Geithner made clear that US patience on China’s currency policy was wearing thin but said only that the valuation of the yuan would be taken into account when the treasury department issues its semiannual foreign exchange report due on October 15th.

The administration has so far refrained from officially accusing China of manipulating its currency for unfair advantage, which would open the door to US trade sanctions. Mr Geithner also appeared to be looking for breathing room for the administration to try to squeeze concessions from the Chinese before frustrated lawmakers press ahead with a Bill that would force its hand.

China’s move to free the yuan from a nearly two-year-old peg to the dollar in June came a week ahead of a meeting of Group of 20 leaders in Canada.

China could retaliate if Congress actually passed legislation. A trade war between the two countries would be a serious blow to President Barack Obama’s effort to ease strains on a range of economic and foreign policy disputes.

Complicating the situation was Japan’s first intervention in six years on Wednesday to push its own currency down from 15-year highs against the dollar as Japan struggles to support its export-led economy. Analysts said allowing Japan a free pass to intervene would make it harder to persuade China to curtail such activity