Yuan drop "extremely disturbing" - US manufacturers

By Doug Palmer

WASHINGTON, Dec 4 (Reuters) - A sudden drop this week in the value of the Chinese yuan CNY=CFXS could reignite political tensions over the huge U.S. trade deficit with China, U.S. business groups said on Thursday.

"This is extremely disturbing," Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, told Reuters as U.S. Treasury Secretary Henry Paulson and other senior Bush administration officials were in Beijing for high-level economic talks.

The yuan's drop came just days before that meeting and just a little more than one month before President-elect Barack Obama takes over in the White House.

During the campaign, Obama accused China of deliberately manipulating its currency to gain a trade advantage and said he supported legislation to let the United States impose countervailing duties against countries that do that.

In Beijing earlier on Thursday, Chinese Commerce Minister Chen Deming brushed aside speculation that China may be engineering a depreciation to help cushion its exporters from the global economic downturn.

"The recent small fluctuation of the yuan against the dollar is quite normal. I would call it the U.S. dollar strengthening, rather than the yuan depreciating," Chen said.

BAD TIMING FOR TEXTILES INDUSTRY

Even as the dollar climbed against other currencies in recent months, the yuan had remained relatively steady against the greenback until Monday, when it had its biggest single-day depreciation since it was taken off a dollar peg in July 2005.

Cass Johnson, president of the National Association of Textile Organizations, said he saw the yuan drop as part of a concerted Chinese government effort to boost exports.

"Not only have they begun to devalue again, but they've increased their export subsidies pretty dramatically for textiles and other products as well," Johnson said.

"That's particularly disturbing since U.S. import quotas on Chinese textiles expire in just 27 days. They're pumping a huge amount of support into their industry at a critical time," Johnson said.

U.S. manufacturers were already unhappy the yuan had stopped rising against the dollar after appreciating roughly 21 percent between July 2005 and July 2008.

The U.S. trade deficit with China hit a record $256.2 billion last year.

But by mid-2007, the stronger yuan appeared to be stopping growth in the trade deficit and setting the stage for it to actually decline this year.

"We thought, 'Wow, maybe it's turning around and getting smaller.' But the last three months, it's really grown a lot and I think that probably reflects that the currency isn't appreciating any more," Vargo said.