[Congressional Record (Bound Edition), Volume 151 (2005), Part 8]
[House]
[Page 10719]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      CHINA'S UNDERVALUED CURRENCY

  Mr. STEARNS. Mr. Speaker, since 1994 China has pegged its currency, 
the yuan, to the United States dollar. Many economists contend that for 
the first several years of this peg, the fixed value was likely close 
to market value, but in the past few years, economic conditions have 
changed, such that the yuan would likely have appreciated, like 
virtually every other currency, if its exchange rates were determined 
by simple market forces. This policy constitutes a form of currency 
manipulation and is intended to give China an unfair trade advantage. 
Also, it is contributing to the loss of United States manufacturing 
jobs.
  China's currency is significantly undervalued vis-a-vis the United 
States dollar. Some experts contend that it is undervalued by as much 
as 40 percent, making Chinese exports to the United States cheaper and 
U.S. exports to China more expensive than they would be if market 
forces determined the exchange rates.
  Furthermore, the undervalued currency has contributed to the large 
U.S. trade deficit with China. It has hurt United States production and 
employment in several U.S. manufacturing sectors, such as textiles and 
apparel and furniture, that are forced to compete domestically and 
internationally against artificially low-cost goods from China.
  If the yuan is undervalued against the dollar, imported Chinese goods 
are cheaper than they would be if the yuan were market-driven. This 
lowers prices for United States consumers and diminishes inflationary 
pressures, but in turn, lower priced goods from China hurt U.S. 
industries that compete with those products, diminishing their 
production and eventually their employment. In addition, an undervalued 
yuan makes U.S. exports to China more expensive, thus diminishing the 
level of U.S. exports to China and job opportunities for U.S. workers 
in those particular sectors.
  Pegging the yuan to the dollar has large implications for the United 
States-China trade. When a fixed exchange rate causes the yuan to be 
less expensive than it would be if it were floating, it causes Chinese 
exports to the United States to be relatively inexpensive and U.S. 
exports to China to be relatively expensive. As a result, U.S. exports 
and the production of U.S. goods and services that compete with Chinese 
imports fall in the short run. Many of the affected firms are in the 
manufacturing sector. This causes the U.S. trade deficit to soar, to 
rise, and reduces aggregate demand in the short run.
  Mr. Speaker, in 2004, China became the United States' second largest 
supplier of imports. A large share of China's exports to the United 
States are labor-intensive consumer goods such as toys and games, 
textiles and apparel, shoes, and consumer electronics. Because the 
manufacturing of these products have, over the past several years, 
shifted overseas, many of these exports do not compete directly with 
the United States domestic producers.
  However, there are a number of small- and medium-sized firms, 
including makers of machine tools, hardware, plastics, furniture, and 
tool and die that are concerned over the growing competitive challenge 
posed by China. An undervalued Chinese currency contributes to a 
reduction in the output of these industries.
  In addition, the low value of the yuan is forcing other East Asian 
economies to keep the value of their currencies low vis-a-vis the U.S. 
dollar in order to compete with Chinese products, to the detriment of 
U.S. exporters and U.S. domestic industries competing against foreign 
imports.
  Furthermore, while China is still a developing country, it has been 
able to accumulate a massive foreign exchange reserve, approximately 
$660 billion at the end of March, and thus, it has the resources to 
maintain the stability of its currency if it were fully convertible.
  Appreciating the yuan would greatly benefit China by lowering the 
cost of imports for Chinese consumers and producers who have used 
imported parts and machinery.
  Finally, China's accumulation of large amounts of foreign exchange 
reserves in order to maintain the currency peg could be better spent on 
investment in infrastructure and development of poor regions in their 
country.
  Recently, the Treasury Department issued a strongly worded report 
warning China over its pegging its currency to the dollar. The report 
called the Chinese currency peg highly distortionary, but the report 
stops short of designating China as manipulating its currency for a 
trade advantage. This designation would have triggered formal 
negotiations between the Bush administration and Chinese officials that 
potentially could end this peg.
  The administration has taken the right steps in taking a harder line 
against China. While I welcome the tough language in the Treasury 
Department report regarding China, Mr. Speaker, the time has come for 
China to act, which will result in freer, fairer trade for both 
countries.

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