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US Economist Bergsten Calls of US Tsy to Call China's FX Bluff

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US Economist Bergsten Calls of US Tsy to Call China's FX Bluff
First Published Tuesday, 14 September 2010 10:30 pm - © 2010

--US Should Take China to WTO Over FX Manipulation --Shld Respond to China US Dlr Purchases With Offsetting RMB Purchases

By Heather Scott

WASHINGTON (MNI) - Noted international economist C. Fred Bergsten said Tuesday it is time for the U.S. government to call China's bluff over its manipulation of the currency and adopt measures aimed at convincing China to finally change its policy.

Speaking to a small group of reporters Tuesday, Bergsten, a former U.S. Treasury official, previewed testimony he is due to deliver to the House Ways and Means Committee Wednesday.

He argues that the U.S. should follow Japan's lead and question China's actions, but go a step further by filing a formal complaint before the World Trade Organization -- preferably with the support of other nations -- and use U.S. trade policy to retaliate unilaterally.

He also calls on the U.S. to respond to China's purchases of U.S. dollars with offsetting purchases of RMB, though he acknowledges this will present technical problems.

Bergsten heads the Peterson Institute for International Economics which now estimates the renminbi is undervalued 15% to 25%, "that's if you want to get their current account surplus down to 3% of GDP which we view as sustainable equilibrium."

To eliminate the surplus, the currency is still 25% to 40% undervalued, he said.

Since Beijing's announcement in June -- just before the Toronto Group of 20 summit -- that the currency would be allowed to respond more to market forces, it has gone up less than 1%. "None of us are very impressed."

China allowed its currency go up 20% to 25% from 2005 to mid-2008, until it was repegged, and "I'm suggesting to the committee that should be our goal, for them to let it go up another 20% to 25% over the next couple of years," Bergsten said. "That I think would go most of the way to dealing with the undervaluation that now exists."

According to analysis by Peterson economist Bill Cline, a 20% revaluation would "have a very powerful effect," reducing China's global current account surplus by $350 to $500 billion and the U.S. global current account deficit by $50 to $120 billion and create 500,000 U.S. jobs, mainly high-paying manufacturing jobs.

To achieve that, Bergsten is urging more forceful course of action, starting with filing a formal complaint in the WTO under Article 15 which prohibits members from using foreign exchange policy to undermine the organization's free trade goals.

The U.S. should launch a "major effort to create a multilateral coalition" to take the case to the WTO, which he said should win support since many countries have expressed concern including the European Union, Brazil, Mexico and India.

The coalition should ask the WTO to authorize retaliation.

Bergsten said he also is calling for a move he terms "countervailing currency intervention in which the U.S. would respond in kind to the Chinese purchases of dollars. We would purchase RMB to directly offset the exchange rate effect of their intervention."

He acknowledged that his "raises some technical problems because of the inconvertibility of the RMB" but said authorities could use proxies including non-deliverable forwards, securities and RMB bonds.

Bergsten praised Japan for immediately complaining about Beijing's purchases of government bonds and the impact on the yen.

Japan Finance Minister Yoshihiko Noda told a Diet committee last week that Japan is unable to buy Chinese state debt and that he wanted Beijing policymakers to "clarify their objectives" regarding recent JGB purchases, according to press reports.

And Prime Minister Naoto Kan was quoted in the press last week saying the government would take strong measures to quell volatile foreign exchange markets, which he called an obstacle for the Japanese economy: "Along with Finance Minister Yoshihiko Noda, I have said that we will take decisive measures if (market moves) are too drastic.""The U.S. has never said anything," Bergsten said.

The economist said he supports the Ryan-Murphy Bill in the House, the Currency Reform for Fair Trade Act, which would consider currency manipulation a subsidy and allow the administration to impose countervailing duties in response.

The goal with these tougher actions, he said, would be to put enough pressure on China to persuade them to change their policies without ever having to resort to retaliation.

"The Chinese have called everyone's bluff so far," Bergsten said, but he stressed when asked about their likely reaction: "Remember that they are the aggressors. If they think we're serious they could change their behavior and prevent it."

The Ryan-Murphy bill would compel Treasury to report to Congress biannually on what nations have "fundamentally misaligned currencies" with the U.S. If those countries do not address this issue within 90 days, the administration would be required to take action at the International Monetary Fund and end federal procurement regarding these nations.

After 360 days, the U.S. Trade Representative would be required to request WTO dispute settlement proceedings.

If the Commerce Department ruled that this currency imbalance amounted to an impermissible subsidy, it could open the door to the imposition of countervailing duties on Chinese imports. It could also lead to anti-dumping remedies being applied to products from China.

Bergsten also noted that though China's current account surplus had come down somewhat in the wake of the crisis, it is rising sharply again, and the IMF projects it will go back to 8% of GDP by 2015, close to $800 billion, bigger than U.S. global deficit

The dollar was trading Tuesday from Y82.92 -- a 15-year low -- to Y83.75, while the yuan finished at 6.7463 against the dollar, up from Monday's close of 6.7618, with a range of 6.7550 to 6.7435.

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