China says U.S. legislation aimed at yuan could damage ties

Reporting from Beijing â€”  China on Thursday warned that a bill passed by the U.S. House that would allow tariffs against currency manipulators could damage ties between the world’s two biggest economies.

Foreign Ministry spokeswoman Jiang Yu said China “firmly opposes� the legislation and told American lawmakers not to engage in protectionism.

Earlier in the day, a spokesman for the Commerce Ministry told state-run media that the legislation violated free trade rules and would do little to solve America’s trade deficit.

“Using the exchange rate to launch an anti-subsidy investigation is inconsistent with the relevant rules of the WTO,� spokesman Yao Jian was quoted as saying by the official New China News Agency.

“You cannot say that China undervalues its exchange rate just because the U.S. has a trade deficit with China and then adopt trade protectionist measures based on this.�

Though neither official mentioned retaliatory action, experts say the specter of a trade war looms larger, especially if the measure the House approved convincingly Wednesday is also passed by the U.S. Senate.

The bill would allow the U.S. to slap tariffs on countries that manipulate their currencies. China’s yuan is believed to be significantly undervalued to give its exports a price advantage in world trade.

Scholars here stopped short of dismissing the bill as political grandstanding for the November elections. They say the global recession and its toll on American jobs has made the exchange rate debate more serious than in the past.

“The pressure on China is more severe than ever before,� said Shi Yinhong, professor of international relations at Beijing’s Remin University. “I think China is very worried about this latest development. If Congress passes this bill, China will take retaliatory action – maybe tariffs.�

Although the Chinese leadership has staunchly rejected calls to boost the yuan, it did remove its two-year peg to the dollar in June, allowing the currency to fluctuate more.

In that time, the yuan has risen only about 2.1%, far short of the 20% to 40% by which some U.S. officials and manufacturers believe the yuan is undervalued.

China’s central bank says it favors currency reform, but not a one-off revaluation that would undermine China’s economy.

In that scenario, thousands of factories would shutter, leaving armies of migrant workers unemployed.

“If all of China’s exporters are levied tariffs it will be quite a devastating event,� said Li Wei, a researcher for the Commerce Ministry. “Migrant laborers would lose their jobs and it would be a huge problem for political stability.�

Yao, the Commerce Ministry spokesman, echoed the belief of economists here who say the U.S. trade imbalance is not the result of exchange rates, but China’s highly developed manufacturing infrastructure that attracts so many exporters.

“China has never gained a competitive advantage from undervaluing� the yuan, Yao said. Multinational firms are worried that a trade war would be just as punishing for American companies, which are increasingly relying on China for profits.

“Blaming China won’t help the US economy but this legislation may cost American jobs,� AmCham-China Chairman John D. Watkins, Jr. said in a statement released Thursday.

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