- The Washington Times - Monday, May 15, 2006

China’s currency rose to its highest level in a decade against the dollar yesterday in what analysts considered a positive reaction by the Chinese to the softer approach the United States is taking on economic relations.

Treasury Secretary John W. Snow passed over an opportunity last week to cite China for manipulating its currency to gain an advantage in trade, while lawmakers who had proposed legislation to impose sanctions against China over the currency peg suspended threats to push their bill after visiting Beijing this spring.

President Bush refrained from seriously reproaching China over the currency issue, a chronic irritant in relations between the countries, when the Chinese president visited Washington last month. Analysts say the United States has been relying on China to play a key role in negotiations over the nuclear ambitions of North Korea and Iran.

China’s move yesterday suggests it has persuaded U.S. officials that a gentler approach will be more fruitful in the end. Chinese leaders do not want to appear to be buckling to foreign pressure. Heated rhetoric and threats of retaliation in the past have prompted them to dig in their heels.

After the U.S. backed off threats to label China a “manipulator” last week, China was free to move ahead and revalue its currency, said Ichiro Ikeda, a senior sales representative with J.P. Morgan Securities Asia.

“China places enormous value on maintaining a positive relationship with the United States, whose vast market remains critical to China’s successful development and growth,” and seeks to avoid unnecessary confrontation, said C. Fred Bergsten, head of the Institute for International Economics.

The Treasury, for its part, is mindful that China has become its second-largest official creditor behind Japan, Mr. Bergsten said, and that is one reason why the United States increasingly engages China rather than confront the Asian giant.

The United States since 2000 has grown reliant on Chinese central bank purchases of U.S. bonds to finance its $300 billion budget deficit and $800 billion current account deficit, which poses a threat to economic stability in the United States and abroad should it become unsustainable.

A Treasury Department report yesterday showed that purchases of U.S. securities by China and other foreigners were not sufficient in the first quarter to cover the external deficit, although purchases in previous quarters have more than sufficed. Any persistent shortfall in financing would have serious repercussions for the U.S. economy.

China appeared to reward the renewed U.S. emphasis on pragmatism, patience and diplomacy by letting the yuan rise and break through a key psychological barrier at 8 yuan to the dollar in Shanghai trading yesterday.

The Chinese government pegged the yuan’s official rate at 7.9982 yuan per dollar yesterday morning, breaching 8 yuan for the first time. The dollar fell as low as 7.9972 on the over-the-counter market from its Friday close of 8.0061. By late afternoon, it had rebounded to 8.0012 yuan.

Treasury Department spokesman Tony Fratto welcomed the move, saying “greater flexibility in China’s exchange rate is something we’ve long advocated.”

Sen. Charles E. Schumer, New York Democrat and co-sponsor of the legislation to punish China, called the move “good news, but only if it portends further movement. The Chinese government knows that reducing controls on the currency is very important to creating a level playing field in world trade.”

The dollar has declined about 3.5 percent against the yuan since China announced a more flexible method for determining the exchange rate last July.

In another sign the administration is making progress this year using quiet diplomacy with China, it won agreement at this spring’s meeting of the Group of Seven to single out China in a statement calling on Asian countries to stop fixing their currencies against the dollar as a way of making their exports cheaper and more attractive to American consumers.

The G-7 statement had a fleeting impact on the dollar, dissipating quickly after the G-7 showed it would not take action to push the dollar lower.

The dollar has been on a downward path in any case, mostly as a result of signs that the Federal Reserve is nearing an end of its two-year campaign to raise interest rates. Higher rates make U.S. bonds and other securities more attractive to foreign investors and have the effect of lifting the dollar.

But with interest rates possibly close to peaking in the United States, and Japan and the European Union moving to raise their own rates, the dollar has suffered by comparison. It hit a one-year low against the euro last week.

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