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Senate aims at China's yuan with eye on jobs

Oct 3, 2011, 10:55 a.m.
A 100 yuan banknote (R) is placed next to a $100 banknote in this picture illustration taken in Beijing November 7, 2010. REUTERS/Petar Kujundzic

By Doug Palmer

WASHINGTON (Reuters) - Lawmakers will take aim at one of China's core economic policies Monday when the Senate begins debating a bill aimed at pressing China to let its currency rise in value in the hope of creating jobs.

A procedural vote late Monday is expected to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

The legislation is widely expected to clear the Senate, but prospects for action in the House of Representatives are murky. If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

Senior White House officials told reporters the Obama administration shares lawmakers' concern about the Chinese yuan's exchange rate, although they have not yet taken a position on the bill. With similar legislation in the past, the White House avoided taking a public stance.

Many Democrats in the Congress, with support from some Republicans, argue that China fixes the yuan at a value below what the market would set, giving Chinese producers an edge in global markets that has contributed to an annual trade deficit with China of more than $250 billion.

In an argument that has gained traction with U.S. unemployment stuck above 9 percent as 2012 elections draw near, supporters of the bill say that if the Chinese currency were allowed to rise in value, Chinese imports would fall and U.S. exports would increase, creating jobs for American workers.

"This will help to level the playing field. China gaming the currency system has clearly undercut our ability to compete in many things," Senator Sherrod Brown, a Democrat from the manufacturing heartland of Ohio, told Reuters last week.

"We have not been aggressive enough with China. I think it has cost a lot of people a middle-class standard of living in my state," he said.

NO TIME FOR A TRADE WAR

Critics of the bill, including business groups, warn the legislation, if enacted, would risk starting a trade war with China -- one of the fastest-growing markets for goods -- at a time when a sputtering global economy can least afford such friction.

China rejects outside criticism of its yuan policies as interference in a sovereign policy decision and says the exchange rate was not to blame for the trade imbalance between the two counties or unemployment in the United States.

Chinese officials note that the yuan has appreciated about 30 percent since 2005. Rising wages and higher inflation in China are further eroding China's comparative advantage.

Jobs are such a hot topic in early 2012 campaigning that prospects for a currency bill clearing Congress could be stronger than in previous years.

The Obama administration, which has preferred dialogue with China to punitive measures, sent a top Treasury Department official, Lael Brainard, to Beijing last week for talks with senior Chinese government officials.

While details of those talks were not disclosed, the Treasury said Brainard was to discuss efforts to spur a global economic recovery and would "reiterate that while the (yuan) has appreciated 10 percent adjusted for inflation since June 2010, the currency remains substantially undervalued, and more progress is needed."

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by the traditionally free-trade-friendly Republicans.

Similar legislation passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, supporters in the House already have more than 200 co-sponsors for the bill and expect this week to reach 218, the number needed to pass it.

However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it remains unclear if the bill would ever face a vote in that chamber.

(Additional reporting by Matt Spetalnick; Writing by Paul Eckert; Editing by Eric Beech)

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