New US strategy needed on China forex - economist

By Doug Palmer

WASHINGTON, May 9 (Reuters) - The United States must take stronger action to persuade China to raise the value of its currency, including possible intervention in foreign exchange markets to frustrate Beijing's efforts to manage the yuan, a prominent U.S. economist told Congress on Wednesday.

"It is obvious that China is extremely reluctant to make the needed changes in its currency policy. It is equally obvious that U.S. efforts over the past four years ... have borne little fruit to date," C. Fred Bergsten, director of the Peterson Institute for International Economics, told a joint hearing in the U.S. House of Representatives in prepared remarks.

U.S. manufacturers claim China's massive intervention in currency markets to depress the value of the yuan, also known as the renminbi, gives Chinese companies an unfair price advantage that has cost millions of American jobs.

A recent joint study by think tanks in Asia, Europe and the United States concluded China's yuan, is undervalued by at least 35 percent against the dollar, Bergsten said ahead of a high-level U.S.-China meeting in Washington later this month to discuss bilateral economic issues.

The Bush administration has relied primarily on diplomatic pressure to persuade China to revalue its yuan and has had some limited success -- including a decision by Beijing in July 2005 to raise the value of yuan by 2.1 percent against the dollar.

"However, China has blocked any significant rise in the RMB (yuan) by intervening massively in foreign exchange markets, buying $15-20 billion per month for several years to hold its currency down. The level of Chinese intervention has almost doubled in the first quarter of this year, to about $45 billion per month," Bergsten said.

Bergsten, an assistant U.S. treasury secretary during the late 1970s, said the White House should immediately notify Beijing it will formally label it a currency manipulator unless it quickly appreciates its currency by 10 percent as a down payment toward further action, he said.

The Bush administration should also mobilize its Group of Seven trading partners and the International Monetary Fund, with the goal of a crafting a new international agreement aimed at boosting currency values throughout Asia, Bergsten said.

The United States should also file a complaint at the World Trade Organization claiming China's currency intervention is a frustration of its trade commitments, Bergsten said.

If other efforts fail, the United States should intervene in currency markets to thwart China's effort to manage the yuan. Since it's impossible to directly buy the yuan, the U.S. Treasury would have to buy "the best available proxies" to make it more difficult than it already is for Chinese authorities to manage domestic inflation, he said.

Last, the Bush administration should quietly notify the Chinese it will no longer block responsible congressional initiatives to deal with the currency issue, and work with lawmakers on a package that would effectively sanction China for skirting its international obligations, Bergsten said.

Don Evans, chief executive of the Financial Services Forum, which represents big U.S. banks and brokerage firms, agreed said the United States should push China to move more quickly toward a "market-determined yuan."

But Evans, who was President George W. Bush's first commerce secretary, said exchange rate concerns should not overshadow the more important goal of persuading China to open its market to more U.S. goods and services. The yuan has appreciated 6.5 percent since July 2005 and could increase as much as 25 percent by 2011, Evans said in prepared remarks.

William Hickey, president of Lapham-Hickey Steel Co. in Chicago, urged Congress to pass a proposed bill allowing the Commerce Department to slap duties on Chinese goods to neutralize the price advantage of Beijing's yuan policies.