* U.S. views China's yuan pledge as welcome shift in tone
* Obama calls China's pledge 'constructive step'
* Treasury's Geithner: test is how far, fast China moves
* Words alone not enough to defuse fight in Congress
(Adds US-China Business Council comment, paragraphs 18-19)
By Emily Kaiser
WASHINGTON, June 19 China's unexpected pledge
on Saturday to allow its currency to rise more rapidly will
probably make for a less contentious meeting with Group of 20
world leaders in Toronto next week.
Unless Beijing swiftly follows up talk with action,
however, the vow will not defuse a fight brewing in the U.S.
Congress over whether to penalize China for what some lawmakers
see as unfair trade practices.
China's central bank said it would gradually make the
yuan's exchange rate more flexible, indicating it was ready to
break a 23-month-old dollar peg that had become a growing
source of friction with the United States. ([ID:nTOE64C02B])
Washington wants a stronger yuan to make its own exports
more competitive with China's. Many economists say the yuan is
undervalued by as much as 40 percent, giving China a trading
advantage and swelling its reserves to more than $2 trillion.
"This is an important step but the test is how far and how
fast they let the currency appreciate," U.S. Treasury Secretary
Timothy Geithner said in a statement. [ID:nN19197539]
Some private analysts doubted China would act quickly.
"Just these words are not going to be enough to satisfy the
U.S. Congress and Treasury," said Marc Chandler, head of global
currency strategy at Brown Brothers Harriman & Co in New York.
"I am skeptical. I am not convinced that these words mean
what they seem to mean."
U.S. Democratic Senator Charles Schumer, who has led a
congressional charge to get tougher on China, called the move
"vague and limited" and typical of China's response to
"Until there is more specific information about how quickly
it will let its currency appreciate and by how much, we can
have no good feeling that the Chinese will start playing by the
rules," Schumer said in a statement e-mailed to Reuters.
STEALING G20's THUNDER
Just one day earlier, it appeared the yuan dispute was
nearing boiling point after Beijing said its currency had no
place on the agenda at the G20 meeting.
U.S. President Barack Obama released a sharply worded
letter to his G20 colleagues saying that free-floating
currencies were "essential" for global economic stability.
"China has once again stolen the thunder from the
international community by timing its announcement of a move
towards greater exchange rate flexibility right before the G20
meeting," said Eswar Prasad, a senior fellow at the Brookings
Institution think tank in Washington.
"The big question is whether this is a symbolic move or a
true shift in China's currency policy that will result in
significant currency appreciation in the near term.
On Saturday, Obama called China's decision a "constructive
step" that can help safeguard the recovery and contribute to
more balanced growth.
The International Monetary Fund called the yuan
announcement a welcome development that would help China
reorient its economy toward domestic demand.
A stronger yuan would promote U.S. exports to China and
"strengthen what is already a positive and beneficial trade
relationship between the two nations," said Rich Lavin, group
president for emerging markets at heavy equipment maker
Caterpillar Inc. [ID:nN19167249]
The US-China Business Council, whose members do business in
China, said it supported allowing the exchange rate to better
reflect market influences.
"China's growing exports and inflation concerns suggest
that China's exchange rate should strengthen," USCBC President
John Frisbie said in a statement. "We look forward to seeing
how the People's Bank of China will implement their statement
NO MORE MR. NICE GUY
Obama's administration has relied on quiet diplomacy to
nudge China into unpegging its currency, much to the
frustration of some lawmakers who thought the White House was
too soft on an increasingly aggressive competitor.
Geithner delayed a report to Congress due in April in which
Washington had to decide whether it would label China a
currency manipulator, a step that could trigger an IMF review
and no doubt anger Beijing.
Geithner had essentially offered China a grace period
through the Toronto G20 meetings, and many economists thought
he would affix the label in the coming weeks.
It appeared that Washington and Beijing had at least an
implicit agreement earlier this year that China would allow the
yuan to rise more rapidly, said Menzie Chinn, a China policy
scholar who teaches economics at the University of Wisconsin.
Europe's worsening debt troubles put that on hold. Europe
is China's largest trading partner, so China had no desire to
do anything that would further harm demand.
"The impending G20 meeting required at least some sort of
indication of impending action," Chinn said.
"Saying that they will allow 'flexibility' means they can
also try to occasionally depreciate the yuan on a day-to-day
basis, here and there, to discourage speculators gambling on
predictable day-by-day appreciation."
But that will probably not be enough to calm tensions among
U.S. lawmakers who want to penalize China.
Unless China gets more specific in the next few days, "we
will have no choice but to move forward with our legislation,"
(Additional reporting by David Lawder, Lesley Wroughton, Andy
Sullivan, Doug Palmer, Paul Eckert and John Poirier in
Washington; William Schomberg in New York; Editing by Kristin
Roberts and Peter Cooney)