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Yuan Legislation Being Resurrected by Congress 5 comments by: Marc Chandler May 13, 2009 | about stocks

Washington contacts report that there is a bipartisan group in the Congress that is attempting to resurrect legislation that would punish China for not appreciating the yuan faster.

The Democrat Senator from Michigan (Stabenow) and the Republican Senator from Kentucky (Bunning) are leading the move in the upper chamber. They will reportedly meet Wednesday with members from the House of Representative, labor leaders and some business representative to discuss their proposal, tellingly, after its introduction.

The proposal would allow companies to petition the government to impose duties on imports (tariffs) for the price advantage allegedly achieved by an under-valued yuan. The senators argued that the under-valued yuan provides an illegal subsidy of 30% or more on Chinese exports.

While similar bills have been introduced in both of the last two sessions of Congress, in neither case did it reach a vote on the floor of either chamber. The rising unemployment rate in the US warns that there might be more support for such a measure than in the past. At the same time, the Treasury Dept has need to use its political chits for more pressing urgent matters, like the crisis response.

Ironically, it was on the eve of this proposal that China's ambassador to the US offered some clarification of the PBOC Governor's pre-G20 papers on reform in the international monetary regime and SDRs. He specifically said that what some took as a challenge to the dollar was more of an intellectual musing of potential long-term reforms.

Back in early 2005, some economists, like those at the Peterson Institute in Washington DC said the Chinese currency was around 20-25% under-valued. In the next 3 years or so the yuan appreciated by about 20-25% against the US dollar and its surplus swelled. At the start of the year, the same economists said, it was still 20-25% under-valued. Having seen how the US took to brow-beating Japan in a similar way in the 1980s, which some suggest is one of the sources of the deflationary pressure from which the Japanese economy has yet to escape, PRC officials are loathe to get caught up in the same dynamics.

Of course, this is not even mention the 800-pound gorilla in the room, which is China's vast holdings of US Treasuries and Agency bonds. Even if the measure dies an ignoble death like the other bills, the mere proposal reminds China and others of the protectionism that lurks below the surface in the United States. Congress is better served, following in this regard the Treasury's lead, to not focus so exclusively on the bilateral exchange rate, but rather help China help itself by boosting the people's living standards through wage increases and increase in the social safety net--radical things, like unemployment compensation, social security and health care. Provide these things and Chinese labor costs will rise and that will reduce a more significant imbalance than the exchange rates.