[Congressional Record Volume 151, Number 42 (Tuesday, April 12, 2005)]
[Senate]
[Pages S3473-S3475]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
EXCHANGE RATE OF CHINESE CURRENCY
Mr. VOINOVICH. Mr. President, I rise today to discuss last
Wednesday's vote against tabling the Schumer amendment. The Schumer
amendment would call on China to move toward a flexible rate or face
corrective tariffs on their exports to the United States. Passing the
amendment would be a responsible way for the Senate to address the
significant problems caused by China fixing the exchange rate of its
currency, known as the renminbi or yuan, to the United States dollar.
I have been concerned about China's trade policies for some time. I
am particularly concerned about the undervaluation of the Chinese
currency caused by China's currency peg. Presently, the yuan is
undervalued between 15 and 40 percent. This systematic undervaluation
of China's currency makes China's exports less expensive and puts
United States workers at a severe disadvantage. As a result, the United
States has lost thousands of manufacturing jobs due to the unfair
competition with China's exports with prices that are artificially low
on account of the undervaluation of the yuan. This is both unfair and
it is unacceptable.
China's undervalued currency also harms China's economy. The Chinese
people pay much higher prices for their imports and China is presently
forced to keep its interest rates artificially low to support the
currency peg, which is causing inefficient investment and excessive
bank lending in China. Moreover, this undervaluation of the Chinese
currency is fueling the dramatic rise of the United States trade
deficit with China and distorting trade relationships around the globe.
Currently, we have a $162 billion trade deficit with China, the
largest that we have with any country in the world. Accordingly,
supporting efforts to get China to move forward toward a flexible
exchange rate is consistent with supporting a more open and efficient
global marketplace.
I was recently in China and had the opportunity to meet with Premier
Wen Jiabao, member of the Politburo Standing Committee and the Chinese
Communist Party's Central Committee. I made precisely these points to
him: That it is in China's best interest to move toward a flexible
exchange rate, and that the Chinese currency peg benefits neither China
nor the United States. I urged him to support moving China toward a
flexible exchange rate.
One of the primary arguments Chinese officials made to defend China's
currency peg is the banking system is not sufficiently developed for a
flexible exchange rate, an argument that Secretary of the Treasury John
Snow makes on occasion when he gives reasons why he is not pushing them
harder for them to stop fixing their currency.
I have an article from The Economist that helps explain in detail why
exchange rate flexibility is in China's best interest, along with the
best interest of the United States. The title of the article from March
19, 2005 is: ``China Ought to Allow More Flexibility in Exchange Rate,
Sooner Rather Than Later.''
I ask unanimous consent to have it printed in the Record.
[[Page S3474]]
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Economist, Mar. 19, 2005]
Economics Focus--Putting Things in Order
china ought to allow more flexibility in its exchange rate, sooner
rather than later
The Chinese government says that it intends, eventually, to
make its exchange rate more flexible and to liberalise
capital controls. In the past year or so, it has already
eased some controls on capital outflows and officials have
said recently that they will open the capital account further
this year. On the exchange rate, much less has been done. The
yuan has been pegged to the dollar for a decade; and the
government is loath to change much until the country's
banking system is in healthier shape: this week the prime
minister, Wen Jiabao, said that a shift would be risky. But
is China putting the cart before the horse? Other countries'
experience suggests that it is, and that it is better to
loosen the exchange rate before, not after, freeing capital
flows.
Most commentary on the Chinese yuan tends to focus on the
extent to which it is undervalued. It has been pegged to the
dollar for a decade, and there is a widespread belief that it
is unfairly cheap. In fact, this is not clear-cut. For
instance, the increase in China's official reserves is often
held up as evidence that the yuan is undervalued. Yet this
largely reflects speculative capital inflows lured by the
expectation of a currency revaluation. Such inflows could
easily be reversed. Given the huge uncertainty about the
yuan's correct level, it makes more sense for China to make
its currency more flexible than to repeg it at a higher rate.
Greater flexibility would be in China's interest: it would
afford the country more independence in monetary policy and a
buffer against external shocks. By fixing the yuan to the
dollar, China has been forced to hold interest rates lower
than is prudent, leading to inefficient investment and
excessive bank lending.
The problem is that Chinese officials, along with many
foreign commentators, tend to confuse exchange-rate
flexibility and capital-account liberalisation. A commonly
heard argument is that China cannot let its exchange rate
move more freely before it has fixed its dodgy banking
system, because that could encourage a large outflow of
capital. A recent paper* by Eswar Prasad, Thomas Rumbaugh and
Qing Wang, all of the International Monetary Fund, argues
that, on the contrary, greater exchange-rate flexibility is a
prerequisite for capital-account liberalisation.
Flexibility does not necessarily mean a free float.
Initially, China could allow the yuan to move within a wider
band, or peg it to a basket of currencies rather than the
dollar alone. The authors first knock on the head the notion
that the banking system must be cleaned up before allowing
the exchange rate to move. Although financial reform is
certainly essential before scrapping capital controls, the
authors argue that with existing controls in place the
banking system is unlikely to come under much pressure simply
as a result of exchange-rate flexibility. Banks' exposure to
currency risks is currently low and flexibility alone is
unlikely to cause Chinese residents to withdraw their
deposits or provide channels for them to send their money
abroad.
The authors argue that it is also not necessary to open the
capital account to create a proper foreign-exchange market.
Because China exports and imports a lot, with few
restrictions on currency convertibility for such
transactions, it can still develop a deep, well-functioning
market without a fully open capital account. A more flexible
currency would itself assist the development of such a
market. For example, firms would have more incentive to hedge
foreign-exchange risks, encouraging the development of
suitable instruments. The experience of greater exchange-rate
flexibility would also help the economy to prepare for a full
opening of the capital account. While capital controls
shielded the economy from volatile flows, China would have
time for reforms to strengthen the banking system.
China instead seems intent on relaxing capital controls
before setting its exchange rate free. This ignores the
history of the past decade or so: the combination of fixed
exchange rates and open capital accounts has caused financial
crises in many emerging economies, especially when financial
systems are fragile. China would therefore be wise to move
cautiously in liberalising its capital account, but should
move more rapidly towards greater exchange-rate flexibility.
yuan at a time
The Chinese have tried to offset the recent upward pressure
on the yuan by easing controls on capital outflows, for
instance by allowing firms to invest abroad. While this is in
line with the eventual objective of full capital-account
liberalisation, it runs the risk of getting reforms in the
wrong order. An easing of controls on outflows may even be
counterproductive if it stimulates larger inflows. By making
it easier to take money out of the country, investors may be
enticed to bring more in.
Capital controls are not watertight. So although China will
continue to be protected from international flows, its
controls can be evaded through the under- or over-invoicing
of trade. Multinationals can also use transfer prices (the
prices at which internal transactions are accounted for) to
dodge the rules. Despite extensive controls, a lot of capital
left China during the Asian crisis in the late 1990s;
recently, lots of short-term money has flowed in. Controls
are likely to become even more porous as China becomes more
integrated into the global economy. Thus, waiting for
speculative and other inflows to ease before changing the
exchange-rate regime might not be a fruitful strategy.
China ought to move to a flexible exchange rate soon, while
its capital controls still work. Experience also suggests
that it is best to loosen the reins on a currency when growth
is strong and the external account is in surplus. China
should take advantage of today's opportunity rather than
being forced into change at a much less convenient time.
Mr. VOINOVICH. I also urge my colleagues to read a paper by the staff
of the International Monetary Fund entitled ``Putting the Cart Before
the Horse: Capital Account Liberalization and Exchange Rate Flexibility
in China.'' That is a January publication by the IMF. I would have
asked it be printed in the Record, but it is 30 pages long and I do not
want to burden the Congressional Record with 30 pages. If my colleagues
are interested in getting a copy of that article, I would be more than
happy to supply it.
These papers show how exchange rate flexibility will facilitate
economic development in China and why China does not have to wait until
its banking system is more fully developed to move toward a flexible
exchange rate.
Moreover, they note that China does not need to immediately float its
currency to remedy the problems caused by an undervalued currency. All
China needs to do is take steps in that direction, such as adopting a
wider exchange rate ban or pegging the exchange rate to a basket of
currencies instead of the dollar alone, for example, a basket of
currencies in the ASEAN countries, including Japan. Either of these
policies would likely cause an upward revaluation of the yuan.
Unfortunately, the Bush administration has refused meaningful action to
get China to move toward a flexible exchange rate.
Last year--I remember it well--on September 8--that happens to be my
wedding anniversary--four of our leaders in this country summarily said
there is no problem in terms of the exchange rate and they refused to
go forward with something called a 301 investigation. The 301
investigation is allowable under the WTO. That is the way you bring
into question whether somebody is following the rules. They said, no,
we are not going to do it. Imagine what kind of a message that sent to
the leaders of the Chinese Government, that we were not even willing to
look at a 301 investigation. That was a mistake.
The United States-China Economic and Security Review Commission, a
bipartisan commission established by Congress to examine China's trade
policies, has concluded that China's exchange rate policy violates both
its International Monetary Fund and World Trade obligations. That was a
bipartisan commission that came together and issued this report. The
commission said China is intentionally manipulating its currency for
trade advantage in violation of its trading agreements. Yet the
administration refuses to act. Unless the United States exerts direct
pressure on China, however, it is unlikely that China will address the
undervaluation of its currency. When I asked the question of Premier
Wen, he said, We know there is a problem, but we are not sure when we
will do it.
I can say they will not do it unless we continue to put pressure on
them to do it and convince them that, again, it is not only in our best
interest but their best interest if they want to be a player in the
global marketplace.
That is why Wednesday's vote was important. It showed the Senate is
willing to take matters into its own hands and take effective steps to
address the serious problem if the administration continues to refuse
to do so. No one wants to see tariffs imposed on Chinese exports, but
the United States needs to take action to address China's unfair
exchange rate policy. I hope Wednesday's vote will motivate the
administration to do more to get China to address the serious market
distortions caused by the undervaluation of China's currency.
I believe in fair trade and improving our trading relationship with
China. I was one of the leaders in the Senate to
[[Page S3475]]
approve normal trade relations with China. I wrote articles in Ohio
magazines. In fact, I gave a copy of an article to Premier Wen to prove
to him I am not a protectionist, I am a free trader.
But I also believe in fair trade. It represents a huge potential
market for our exports. If we want to have trade with China, though,
China must be a better trading partner, starting with its exchange rate
policies. Furthermore, if we want to have a free and fair global
trading system, China must take actions to move toward a flexible
exchange rate. I, therefore, believe Wednesday's vote was a responsible
step aimed at advancing global trade and, in particular, America's
long-term trading relationship with China.
I say to the Presiding Officer, as you know, there was an agreement
made that it would be pulled down from the foreign relations
authorization bill, and this is going to be considered again. There is
an agreement, in the form of a UC, that we will be bringing it up
again. I hope before the Senate considers voting on that amendment with
an up-or-down vote the administration will get the message that they
have to do something to show a little bit of spirit and indicate to us
that they understand and know that the Senate and the House of
Representatives are serious about moving forward to deal with this
problem.
I also think the vote on this particular amendment sends a strong
signal, a signal to Premier Wen and to President Hu that we are
concerned about this issue. I know they are concerned about jobs. We
are concerned about jobs. They have to understand that. I am hoping
instead of the administration looking at this as some kind of a
negative action on the part of the Senate, that they will see that we
are helping them communicate the message to the people over there that
we are serious about a problem.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER (Mr. Chambliss). The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. INHOFE. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. INHOFE. Mr. President, I ask unanimous consent that I be
recognized for up to 30 minutes as in morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.
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