Will 2012 be the year that the U.S. Congress finally gets tough with China regarding its fixed-band yuan currency? It could be, if an executive branch volley is any indicator.
President Barack Obama Sunday maintained his pressure on China's foreign exchange policy and trade practices, arguing enough's enough regarding what the United States says is a too-slow appreciation rate for the yuan.
Changes are difficult for them politically, I get it, Obama said at a Sunday night news conference at the Asian Pacific Economic Cooperation summit in Hawaii, Bloomberg News reported Monday. But the United States and other countries, I think understandably, feel that enough's enough.
Obama said most economists estimate that the yuan, which traded Monday at about 6.3354 to the U.S. dollar, is undervalued by about 20 percent to 25 percent, CNN.com reported Monday.
Fixed-Band Yuan Policy
China keeps it currency, the yuan, pegged to the dollar at roughly 6.33 yuan to the dollar. The peg has the effect of substantially decreasing the price of China's exports to the U.S., which in many cases gives its companies a price advantage.
China argues that the fixed yuan is necessary for its embryonic, vulnerable economy, and that the world benefits from the nation's cheaper goods.
The United States counters that the practice is the equivalent of monetary mercantilism -- an unofficial subsidy that enables China to grab market share for exports that it would not otherwise if the yuan was allowed to float freely.
On Sunday, China's President Hu Jintao countered that his government may keep the yuan's exchange rate stable for a while, economictimes.com reported Monday. Hu said the U.S.'s trade and employment problems would not be solved by even a major appreciation of China's currency versus the dollar.
Public Policy/Economic Analysis: Obama administration's efforts to encourage China to let the yuan appreciate more quickly will require U.S. Congressional support. Further, Capitol Hill officials need not fear an extreme response by China, such as dumping U.S. Treasuries: outside of the United Kingdom and nitch Switzerland, China has no place to park its money, due to the uncertainty regarding the euro, and an unwillingness to put a large amount of reserves in Japan's yen.
Moreover, even if China responded by rotating some money from U.S. Treasuries, there are ample institutions ready to replace China's investments, due to the current desire for safe havens in a challenging (to say the least) investment climate. Hence, there's no time like the present for Congress to encourage China to adopt a more-flexible yuan policy.