Enough about the yuan already

By Colin Barr, senior writer

(Fortune) -- A currency clash makes for compelling drama, but the United States and China have more pressing problems -- including how to mop up stimulus spending and plot a course for more sustainable growth.

A Senate bill introduced this month would make it easier for the Treasury Department to tag China with trade sanctions for reaping the benefits of a weak currency.

Sponsors hope to prod China's government to let the yuan appreciate against the dollar, in a bid to trim Chinese exports and ease high U.S. unemployment. Chinese officials, eager to talk tough to a big rival and under pressure from exporters who employ millions of workers, have warned against "politicizing" the issue.

But the squabble over the yuan "really is just a symptom of bigger trade tensions," said Douglas H. Paal, vice president for studies at the Carnegie Endowment for International Peace. "The real question is how to deal with their core rebalancing problem."

The economic imbalances are no secret. China last year became the world's biggest exporter, after a run of surpluses that helped it amass a staggering $2.4 trillion of foreign exchange reserves. Much of that stash is in dollars, thanks to a decade of profligate U.S. spending funded by Chinese bond purchases.

But a decade of trade strength has given China new vulnerabilities. Global demand for goods is soft, dimming export growth prospects, and big trading partners such as the United States are wallowing in debt, threatening the value of China's foreign currency hoard.

Accordingly, calls for China to boost consumer spending and diversify its economy have gotten louder. Gaining better balance looks even more pressing in the wake of the massive stimulus spending the Chinese government undertook in 2009.

Cleaning up the excesses of that effort poses "the largest macroeconomic risks," the World Bank said in its quarterly report on China.

While letting the yuan rise against the dollar could help China manage its economic problems, an appreciating currency alone will not be enough at a time when Chinese policymakers must also deal with rising inflation, bubbly house prices and souring loans.

Americans aren't the only ones complaining about the yuan. European Union trade commissioner Karel De Gucht recently joined the U.S. criticism of the undervalued yuan, though he has also questioned U.S. plans to boost exports.

Chinese Premier Wen Jiabao recently conceded that juggling a return to strong growth with inflation fighting and economic rebalancing would be "a tough job," the state-owned Xinhua news agency reported.

Meanwhile, the United States has troubles of its own in withdrawing government support for the economy and spurring new job growth.

"It's in our interest to sell more into their market," said Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institute. "But that's not going to happen over night."

Despite the posturing of recent weeks, the U.S. and China will have ample opportunity to find common ground. Ministers are scheduled to talk in May at the regular Strategic and Economic Dialogue, and U.S. policymakers are trying to arrange for a visit this spring from Chinese President Hu Jintao.

In the meantime, Treasury is scheduled to report to Congress April 15 on which nations are intentionally manipulating their currencies. If Treasury rules that the Chinese are holding down the value of the yuan for the sake of gaining an unfair competitive advantage, it could impose sanctions.

Treasury Secretary Timothy Geithner raised eyebrows last year when he told Congress the Obama administration believed China does manipulate the value of the yuan. But last year's Treasury report didn't name China as an intentional currency manipulator.

There has been much discussion of the April 15 deadline. But Treasury has the flexibility to delay making any sort of recommendation -- and might well do so rather than risk further inflaming relations with China, said Lieberthal.

Ultimately, China is likely to let the yuan float higher because it "makes a lot of sense for them politically," said Lieberthal. "But at the end of the day, it's really a very minor issue." To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.