SCENARIOS-US mulls calling China currency manipulator

Thu Oct 14, 2010 4:40pm EDT

 WASHINGTON, Oct 14 (Reuters) - The Obama administration is
due to say on Friday whether it believes China manipulates its
currency for an unfair trade advantage, a decision that could
sour ties between the world's two biggest economies.
 The Treasury Department is required by law to issue
twice-yearly reports on the currency practices of the major
U.S. trading partners by Oct. 15 and April 15 each year.
 The U.S.-China Business Council said on Thursday it had
heard from the Obama administration the latest report would be
released on Friday, even though it is often delayed.
 The last report was not issued until July 8, more than two
months late.
 The following are three options the administration could
pursue and a look at the potential implications of each:
 TREASURY DOES NOT LABEL CHINA A MANIPULATOR - PROBABLE
 If the administration declines to label China a currency
manipulator for the fourth time since Obama took office, it may
keep an uneasy peace with Beijing at a time when financial
markets are worried about trade and currency tensions.
 But giving China another pass also risks making Obama look
impotent on an issue he says is a real concern just as his
fellow Democrats head into congressional mid-term elections on
Nov. 2. Voter worries on the economy could shift control of the
House of Representatives to Republicans.
 The U.S. House has already passed a bill penalizing the
imports of countries whose currencies are fundamentally
undervalued. Declining to name China a currency manipulatorcould discourage the U.S. Senate from acting on its own
currency bill by sending a signal that Obama is unlikely to
sign the legislation, despite calling China a currency
manipulator on the 2008 presidential campaign trail.
 U.S. Treasury Secretary Timothy Geithner told lawmakers
last month that citing China for currency manipulation would
only have the effect of triggering consultations with Beijing.
He noted the United States was already pursuing the issue
bilaterally and through the International Monetary Fund.
 However, many detected a change in Geithner's tone last
week when he complained that China's behavior was discouraging
other countries from allowing their currencies to appreciate.
That has added uncertainty to the pending decision.
 If the U.S. government holds off in naming China a currency
manipulator, this should be a green light for continued selling
of the U.S. dollar and buying of Asian currencies as investors
breath a sigh of relief over the avoidance of a dispute between
the United States and one of its main creditors.
 TREASURY DELAYS THE REPORT - POSSIBLE
 Geithner could delay the report, an option he used in April
to give China more time to act on its own and something the
administration of former President George W. Bush did several
times when big international meetings were looming.
 The upcoming G20 meetings on Oct. 22 and in November in
South Korea provide a ready excuse, although it would be
unusual for Treasury to announce a delay with so little time
left before the report is due. For example, Geithner announced
on April 3 that the report due on April 15 would be delayed
until after Group of 20 meetings in June.
 This option would buy the administration time to see what
China will do. The yuan has risen about 2.5 percent since China
depegged its currency on June 19 this year. If it continues to
rise, Geithner may be able to argue to Congress that Beijing is
committed to reform.
 Geithner could argue that an extended delay -- perhaps to
the end of the year -- would allow time for the administration
to better assess China's progress. It also would put the onus
on the Senate to decide whether to act or not.
 If lawmakers return from the election and let the House
bill die, as it will if the Senate does not pass it by the end
of the year, the White House could say Congress had a chance to
act on the issue but decided against it and it could take
pressure off the administration to label China a manipulator.
 A delay in the release of the report would be neutral to
negative for the U.S. dollar because this would suggest that
the U.S. government may be expecting an agreement for a
stronger Chinese currency at the upcoming G20 meeting.
 TREASURY LABELS CHINA A CURRENCY MANIPULATOR - UNLIKELY
 Judging from the past, this is the least likely option. The
Treasury Department has not named any country a currency
manipulator since July 1994 when the administration of
President Bill Clinton cited China.
 However, President Barack Obama's administration has
stepped up pressure on China in recent weeks to speed up
appreciation of the yuan currency. The Treasury has focused its
efforts on working with other Group of 20 nations.
 If Washington labels China a currency manipulator, Beijing
may consider the move a provocation and put at risk the chances
of cooperation on the issue at a G20 finance ministers meeting
next weekon and a leaders summit in Seoul on Nov. 11.
 It could encourage the U.S. Senate to follow the House of
Representatives and pass legislation to penalize imports from
countries with fundamentally undervalued currencies when
lawmakers return in mid-November from an election break.
 The U.S. dollar and Japanese yen are expected to rise if
the Treasury labels China a currency manipulator as this
scenario is viewed as negative for risk appetite. Normally the
prospect of the United States upsetting China, one of its
largest creditors, would be negative for the dollar. However,
The dollar and yen have tended to strengthen when investors
become concerned about the outlook for global growth.
 (Reporting by Doug Palmer; editing by Bill Schomberg)


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