China Rips US Senate Vote on Yuan - Wall Street Journal

SHANGHAI—China's angry response to a U.S. Senate vote to move ahead with a bill to punish Beijing for keeping the value of its currency low reflects domestic pressures on the leadership to act tough, but is unlikely to result in any precipitous action, analysts and economists say.

China's reaction on Tuesday to the 79-19 vote was swift and coordinated.

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The People's Bank of China cautioned in a statement that passage of the bill won't resolve U.S. domestic economic difficulties but could instead "seriously affect" China's continuing exchange-rate reform and even lead to a trade war. It said that with inflation factored in, the yuan has appreciated "greatly" and is close to a balanced level.

China's Foreign Ministry said the bill violates rules of the World Trade Organization, while the Ministry of Commerce described it as "unfair" and in violation of international practice.

Economists say they do not expect the angry words will translate into policy shifts or retaliation, at least while the fate of the bill is up in the air. Even though the vote advanced in the Democrat-controlled Senate, it faces an uncertain future in the Republican-controlled House.

"I don't think China will make any big move in response," said UBS economist Wang Tao, adding that she believes that there is only a small chance the bill will become law.

"China won't yield to the pressure from the U.S. or change its gradual approach to yuan exchange-rate reform," Ms. Wang said.

Supporters of the Senate bill complain that China's yuan is undervalued, making its products cheaper on world markets. They say a higher yuan would boost U.S. exports and create thousands of American jobs. Opponents say the measure would accomplish little besides infuriating China, and that the U.S.-Chinese relationship faces far bigger issues.

Senior Chinese officials have become increasingly forceful in their approach to the U.S. since the global recession, with many convinced that China is now in the ascendant and the U.S. is in permanent decline. Some feel that China has the upper hand as the largest holder of U.S. debt—and the only major economy still growing rapidly.

Chinese leaders openly blame the U.S. for plunging the world into crisis as a result of economic mismanagement, and resent moves that America has taken to boost its recovery, including buying bonds to hold down interest rates —so-called quantitative easing—which they argue is debasing the U.S. dollar and pumping up inflation in China and other emerging economies.

Pressure on the Chinese leadership is also coming from a nationalistic public, which is outraged by continued U.S. arms sales to Taiwan, and a more forceful U.S. diplomatic engagement with Southeast Asia, where several countries are in territorial disputes with China in the South China Sea.

Still, balanced against Chinese assertiveness is a strong desire by China's leaders to avoid upsetting the relationship with the U.S. ahead of a critical year in 2012 when there will be presidential elections in America and a leadership transition in China. They need external stability to focus on delicate transition politics.

Chinese leaders also recognize that in a globalized economy, their own fate is closely linked to that of the U.S. and a trade war would likely be as damaging to China as the U.S.—perhaps even more so given China's greater reliance on exports.

But under the surface of Beijing's harsh words in response to the Senate vote, Beijing left the door open for reconciliation, reiterating its long-standing pledge to continue exchange-rate reforms. That's likely a sign of lingering hopes that the Republican-controlled U.S. House will vote down the currency bill.

Indeed, both the Foreign Ministry and central bank also repeated Tuesday Beijing's standard rhetoric that China will continue to increase the yuan's flexibility over time.

There are indications that Beijing has been trying to keep the yuan's appreciation intact despite mounting global economic uncertainties caused by the debt woes in Europe and slowing growth in the U.S. In the face of heavy yuan selling last week, triggered by risk aversion and concerns that the Chinese economy will have a hard landing, the central bank kept supporting the yuan's value by setting the currency higher through a daily reference exchange rate.

At 6.3859 yuan to the dollar ahead of China's week-long National Day holiday, the yuan was down 0.1% against the U.S. currency in September, but up 6.9% since June 2010, when China ended its currency's two-year peg to the dollar.

The Senate's vote appeared to have little notable impact on the yuan in the less restricted offshore Hong Kong market, where the currency mostly tracked its regional peers and remained more or less steady versus the dollar on Tuesday.

The Senate vote puts the White House in a delicate position. Like previous administrations, the Obama White House is wary of antagonizing Chinese leaders, whose cooperation it needs not just on economic issues but also on an array of national security matters. But criticizing China remains popular with the public, and many Democrats, including those from big industrial states, say China's currency policy is unfair to U.S. workers.

"They use the rules of free trade when it benefits them, and spurn the rules of free trade when it benefits them," said Sen. Charles Schumer (D., N.Y.), a major sponsor of the bill. "For years and years and years, Americans have grimaced, shrugged their shoulders, but never done anything effective" to stop these policies.

Opponents of the bill say that instead of potentially sparking a trade war, the U.S. should face its own problems, such as the burgeoning federal budget deficit. "It's like we know what we've got to do but we won't do it," said Sen. Bob Corker (R., Tenn.). "It's like we've got to find a bogeyman."

Because House leaders are reluctant to bring up the bill, its future is uncertain. The House overwhelmingly passed a similar bill in September 2010, when Democrats controlled the chamber, but GOP leaders argue today that the new bill could have unintended consequences.

—Stefanie Qi and Andrew Browne contributed to this article.

Write to Shen Hong at hong.shen@dowjones.com

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