FED CALLS RENMINBI “EFFECTIVE SUBSIDY”
By Krishna Guha in Beijing,
Edward Luce and Eoin Callan in Washington
and Alan Beattie in London
Monday, December 18, 2006
Ben Bernanke stepped into a political minefield on Friday when he released remarks branding China's undervalued currency an “effective subsidy” for its exporters that was distorting patterns of production and trade.
Although the Federal Reserve chairman dropped the phrase in a speech in Beijing, using instead the less inflammatory term “distortion”, the Fed was standing by the language of the original text
His comments were welcomed by US manufacturers. Frank Vargo, of the National Association of Manufacturers, said: “This is a very important message. The administration has been talking simply about currency flexibility. But Bernanke has come out and called the currency undervalued and told Beijing it is distorting the Chinese economy. That is significant.”
Mr Bernanke's original draft talked about “the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting rather than producing for the domestic market”. If the Bush administration were to agree that the Chinese exchange rate manipulation constituted a “subsidy”, the US could in theory take China to the World Trade Organisation for violating trade pacts.
Hank Paulson, the Treasury secretary who led the delegation and faced pressure to harden his rhetoric, said: “All I can say is that the chairman of the Fed is entitled to his independent comments.”
The incoming Congress took the speech as a cue to launch anti-dumping legislation – which has been looming since Democrats won the midterm elections on a wave of economic populism.
Sander Levin, head of the House committee on trade, on Friday night unveiled a controversial bill to permit the use of anti-subsidy laws in response to “currency manipulation” by Beijing.
Daniel Griswold, at the Cato Institute, said: “This bill is not cataclysmic but could pass and would damage trade ties.”
The Fed chairman's comments came in a balanced speech in which he urged China to embrace further appreciation of the renminbi, combined with a wider trading band with the goal of a market-determined exchange rate.
