Currency tightrope act a Snow job of the highest order
United States Treasury Secretary John Snow is not usually a figure who elicits much sympathy but visiting China this week he is likely to find himself being ground between a rock and a hard place.
The rock is the US Congress, where senators continue to accuse China of holding the value of the yuan artificially low in order to steal an unfair trade advantage over American manufacturers. The hard place is Beijing, where officials insist they are pushing ahead with foreign exchange market reforms as fast as they can without jeopardising China's financial stability and economic growth.
China's 2 per cent revaluation in July silenced Beijing's critics only briefly. Now they are increasingly irate that in the 12 weeks since the July 21 policy change, the yuan has appreciated by only 0.25 per cent against the US dollar - less than the amount by which Beijing said it would be allowed to fluctuate in a day. To Capitol Hill's China bashers, that is unacceptable manipulation. Mr Snow escaped one potential crunch point before leaving Washington when he postponed until November a Treasury report into China's exchange-rate regime that could formally accuse China of manipulating its currency, opening the way to trade sanctions.
He has bought only a little time, however. Last week Charles Schumer, a leading light on the Senate Finance Committee, made clear he expected Mr Snow to win a significant appreciation of the yuan this week or the Senate would press forward with blanket tariffs on Chinese imports.
In Beijing, however, Mr Snow is likely to be told he has nothing to complain about. Since China introduced its basket exchange-rate system in July, the US dollar has risen by 0.5 per cent and 3 per cent, respectively, against the euro and the yen, the two other main components of any basket. If Beijing had been holding its currency steady against a trade-weighted basket, the yuan would actually be weaker now against the US dollar than immediately after revaluation.
That is unlikely to mollify Congress. Nor are other reforms China has recently introduced, including greater yuan convertibility and new hedging instruments like forward foreign exchange contracts.
Nevertheless, Mr Snow could still gain a compromise that satisfies both parties. While Beijing is unlikely to permit any significant yuan volatility this year, market reforms will help China's financial system to manage greater exchange-rate fluctuations in the future.
If Mr Snow can return to Washington with a credible pledge that China will further loosen its grip on the yuan next year - something Beijing appears to be planning anyway - he may be able to dampen protectionist pressures in Congress for another six months or so.
If China does then allow greater exchange-rate fluctuation in mid-2006, including more yuan appreciation against the dollar, it would allow the hawks on Capitol Hill to claim a significant political victory ahead of the mid-term Congressional elections next November; a prospect to soften the heart of even the stoniest senator.