- The Washington Times - Saturday, November 21, 2009

China’s economic and trade policies contributed to the global financial crisis and are laying the groundwork for the next one, according to a new report by a congressionally chartered commission.

The report prompted a bipartisan request on Capitol Hill for the Commerce Department to investigate whether China has been manipulating its currency to subsidize its exports, thereby gaining an unfair trade advantage over the U.S.

After the report was issued Thursday, Sens. Charles E. Schumer, New York Democrat, and Lindsey Graham, South Carolina Republican, wrote to Commerce Secretary Gary Locke urging him to use his authority “to initiate investigations” of charges by U.S. manufacturers that China has been manipulating the value of its currency.

Some of the commission’s conclusions were very pointed.

“The commission notes a disturbing trend away from the development of a free market system and instead sees moves to greater government control of the economy,” said Carolyn Bartholomew, chairman of the U.S.-China Economic and Security Review Commission, which Congress established in 2000 to investigate, analyze and provide recommendations to Congress on the economic and national security implications of the U.S.-China relationship. Ms. Bartholomew previously served as a foreign policy adviser to Democratic leader Nancy Pelosi and as a staff member of the House intelligence committee.

The commission’s annual report concluded that “Beijing’s industrial policy was a contributing factor to the imbalances that led to the global financial crisis that affected the economies of rich and poor nations alike.”

The pursuit of export-promoting policies has generated China’s massive trade surpluses, the report said. Those surpluses have led to China’s accumulation of $2.3 trillion in foreign-exchange reserves, the world’s largest cache, most of which is invested in dollar-denominated assets.

“The United States today no longer is the world’s biggest creditor,” the report noted. “It is the world’s biggest debtor, with China as the largest overseas holder of U.S. debt instruments.”

Many analysts have worried that China could dump its massive dollar reserves, forcing the greenback to plunge in value and sending U.S. interest rates skyward. But the report concludes that China has a major disincentive to do so. “The size of China’s dollar reserves makes it unlikely that China could divest its dollars without reducing the value of its holdings,” the report concluded.

The report acknowledged that China’s two-year, $586 billion economic stimulus program is strengthening China’s social safety net and increasing domestic consumption, two policy goals China’s trading partners have been urging Beijing to pursue for years. But the commission worries that China’s ongoing export strategy will overwhelm the stimulus plan’s positive effects.

Larry Wortzel, the vice chairman of the commission whose 32-year military career included two tours of duty as a military attache in China, noted that “China’s growing international economic interests are leading China to be more active on the international scene, especially in regards to energy and resource acquisition.” He also said that China’s espionage activities against the United States “are increasing greatly.”

Perhaps the biggest economic dispute between the United States and China involves China’s currency policy. The report said that China’s currency “remains substantially undervalued,” providing a major export subsidy to domestic and foreign firms operating in China.

China’s currency, the yuan, which is currently pegged at 6.83 to the dollar, “should go to five to the dollar,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Peter Morici, a University of Maryland business professor who served as chief economist for the U.S. International Trade Commission, said the yuan should be revalued at four to the dollar.

This year, China will likely achieve its fifth consecutive $200 billion-plus merchandise trade surplus with the United States. The Treasury Department reported earlier this month that China holds nearly $800 billion in U.S. Treasury debt securities. China also holds more than $400 billion in debt issued by U.S. agencies including Fannie Mae and Freddie Mac.

“If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity and lay the groundwork for the next crisis,” the commission’s report concluded.

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