Chinese School - US plots deal over yuan valuation

WORLD / Wall Street Journal Exclusive

US plots deal over yuan valuation
By MICHAEL M. PHILLIPS (WSJ)
Updated: 2006-07-27 08:48

http://online.wsj.com/public/article/SB115369879175614900-bonxu14OFa3IjamcC
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WASHINGTON -- The Bush administration is trying to play to China's global
ambitions as a tactic to persuade Beijing to allow its currency to rise
more against the U.S. dollar.

The U.S. is quietly dangling the prospect that it will help China secure
more power in the International Monetary Fund, the 184-nation body that
rescues cash-strapped countries, if Beijing stops keeping the yuan so
weak against the dollar -- a practice driving a protectionist backlash in
Congress.

"If we're going to give China or any other country ... greater weight in
the IMF, then they need to take their responsibilities in that
institution seriously, and they need to play by the rules as they're laid
out," said Timothy Adams, Treasury undersecretary for international
affairs.

The U.S. hasn't said overtly that China must relax its grip on the yuan
to gain more voting power in the IMF. But America's message has been
clear: "Membership has its rewards; it also has its responsibilities,"
Mr. Adams said.

Prodded by manufacturers and unions, lawmakers from both U.S. political
parties have accused China of cheating in international trade, because an
undervalued yuan makes Chinese goods cheaper for Americans.

To fend off congressional threats of protectionism, the White House and
Treasury have been using the few levers they have to cajole China into
allowing the yuan to rise. China has responded in small steps. A year ago
-- on July 21, 2005 -- Beijing said it would raise the yuan's exchange
value against the dollar by 2.1% and allow it to fluctuate with market
forces. Since then, however, the yuan has climbed only an additional 1.5%.

The yuan "is by no means moving based on the market," Hiroshi Watanabe,
Japan's vice finance minister for international affairs, told reporters
in Tokyo Thursday. "More flexibility is desirable."

The IMF has been trying to get China -- and by extension South Korea and
some other Asian nations that track China's exchange rate -- to reduce
their reliance on weak-currency-driven exports. Although the IMF hasn't
been as aggressive as the U.S. would like, it has said that China's
rising trade surpluses, or the margins by which exports exceed imports,
indicate "increased undervaluation" of the yuan.

At the same time, the IMF is grappling with how to give these rising
powers their fair share of control of the institution itself. The IMF was
created by the industrialized Western countries after World War II, and
voting power on its board of directors continues to reflect, in large
part, their past economic strength. Asia accounted for about 22% of
global economic output in 2003, about a third higher than its share of
IMF votes.

China's representative on the IMF board declined to comment on the
prospect of an increased role at the IMF. Beijing hasn't been pushing
nearly as hard as South Korea to get the IMF to revamp its system. That
is in part because China already has its own seat on the 24-member IMF
executive board, the institution's policy-making body, while South Korea
is part of a group of 14 countries that share a seat. "The Chinese have
been very good about not asking for a quota increase for the very reason
that they know we'll ask for more movement on the currency," said Mr.
Adams.

IMF Managing Director Rodrigo de Rato is revisiting the issue of how much
each country should contribute to the lender -- its quota -- and,
therefore, how much weight it should have in decision making. He would
like members to approve a small, quick share increase for China, Mexico,
Turkey and South Korea at the IMF's annual meetings in Singapore in
September.

"We are examining how a change in the structure of quotas would better
reflect important changes in the world economy that have taken place,
especially the increasing weight of emerging-market economies," IMF
Deputy Managing Director Takatoshi Kato said in a speech in Manila
Thursday.The U.S. has indicated general support for the idea, but is
withholding full endorsement in part to keep the pressure on Beijing.

The opposite tactic, giving China a bigger voice at the IMF first, might
work better, says Harvard Prof. Kenneth Rogoff, a former IMF chief
economist. "One of the reasons to increase Asian representation in the
IMF is to make them feel more enfranchised and more willing to
cooperate," he said.

A major redistribution of voting shares to increase the power of Asia and
other emerging nations would likely mean diminished power for small
European nations such as Belgium and the Netherlands, among others. The
U.S. Treasury predicts that it could take a year or two to negotiate a
new formula for divvying up control of the IMF board. The last major
quota increase took place in 1999.

A change in IMF quotas likely would require congressional approval. The
Bush administration is quietly using that to prod China, implying that
Beijing will have a hard time persuading lawmakers to sign on to an
IMF-quota increase unless the yuan has climbed substantially, foreign
banks have gained more access to China, and China has taken steps to
reduce dependence on exports to the U.S.

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