[Congressional Record (Bound Edition), Volume 151 (2005), Part 5]
[Senate]
[Pages 6075-6077]
[From the U.S. 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 exchange 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's 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 by between 15 and 40 percent. This systematic 
undervaluation of China's currency makes China's exports less expensive 
and puts U.S. workers at a severe disadvantage. As a result, the United 
States has lost thousands of manufacturing jobs due to unfair 
competition with China's exports whose prices 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, who is a member of the Politburo Standing Committee of 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 have made to defend 
China's currency peg is that its banking system is not sufficiently 
developed for China to have a flexible exchange rate, an argument that 
Secretary of the Treasury John Snow also 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 explains 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.
  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

[[Page 6076]]

     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 liberal-
     isation.
       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 of the ASEAN countries, including Japan. Either of these 
policies would likely cause an upward revaluation of the yuan. 
Unfortunately, the Bush administration has refused to take 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 Organization 
obligations. 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. During my 
meeting with 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 this 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 approve normal trade 
relations with China. I wrote articles in Ohio magazines in support of 
trade with China. 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

[[Page 6077]]

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 the Schumer amendment would be pulled from the foreign 
relations authorization bill, but that it would 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 Chinese officials that we 
are serious about this 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.

                          ____________________