[Senate Hearing 109-505]
[From the U.S. Government Publishing Office]
S. Hrg. 109-505
THE REPORT TO THE CONGRESS
ON INTERNATIONAL ECONOMIC
AND EXCHANGE RATE POLICIES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
EXAMINATION OF THE REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND
EXCHANGE RATE POLICIES, FOCUSING ON IMBALANCES IN THE GLOBAL ECONOMY,
AND CHINA'S CURRENCY REGIME
__________
MAY 26, 2005
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Skip Fischer, Senior Staff Professional
Stephen R. Kroll, Democratic Special Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
?
C O N T E N T S
----------
THURSDAY, MAY 26, 2005
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Allard............................................... 2
Senator Dole................................................. 3
Senator Schumer.............................................. 4
Prepared statement....................................... 35
Senator Crapo................................................ 6
Senator Sarbanes............................................. 7
Senator Bennett.............................................. 9
Senator Bayh................................................. 9
Senator Hagel................................................ 11
Senator Stabenow............................................. 11
Prepared statement....................................... 35
Senator Carper............................................... 27
WITNESS
John W. Snow, Secretary, U.S. Department of the Treasury......... 13
Prepared statement........................................... 36
(iii)
THE REPORT TO THE CONGRESS
ON INTERNATIONAL ECONOMIC AND
EXCHANGE RATE POLICIES
----------
THURSDAY, MAY 26, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SH-216, Hart
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order. We are
very pleased this morning to welcome Secretary of the Treasury
John Snow to testify on the Treasury Department's Report to the
Congress on International Economic and Exchange Rate Policies.
Secretary Snow, the Treasury report is of great interest to
this Committee and will provide us much to debate this morning
and in the weeks to come. As you are well aware, many Members
of Congress, including myself, find the continued imbalance of
trade with China to be a significant concern.
The U.S. current-account deficit hit a record $666 billion
last year, or 5.6 percent of GDP. Coinciding with this deficit
has been the purchase of large volumes of Treasury securities
by the Chinese and Japanese central banks. As of March of this
year, Japan's reserve holdings of Treasuries stood at $679.5
billion while the value of China's reserves were at $223.5
billion. While some may argue that these numbers are a natural
outgrowth of globalized financial markets, the numbers also
raise questions about whether the current world trade situation
present a level playing field. The continuing weakness in the
manufacturing sector made the trade and exchange rate policies
in China and Japan a tangible issue to U.S. businesses and
taxpayers.
Treasury's May report indicates that no major trading
partner of the United States met the technical requirements for
currency manipulation under the Omnibus Trade and
Competitiveness Act of 1988 during the second half of 2004.
However, Mr. Secretary, the report went on to indicate that
``Current Chinese policies are highly distortionary and pose a
risk to China's economy, its trading partners, and global
economic growth.'' As you will hear this morning, Members of
Congress were disappointed to hear that once again Treasury had
failed to make a currency manipulation determination. They
think you punted.
Secretary Snow, this Committee would like to engage you in
a serious discussion this morning about the specific measures
the Administration will take in the next 6 months to move China
forward on a flexible rate path. Over the long-term, both the
United States and the global economy will benefit most from the
continued pursuit of free trade and flexible exchange rate
policies. The most desirable way to reduce our current account
deficit would be through stronger growth abroad and more open
trading markets and policies.
We look forward to a thoughtful discussion this morning so
that we might all leave this hearing with a broadened awareness
of the situation and the direction ahead. This is a very
important issue to the American people, I believe, Mr.
Secretary.
Secretary Allard.
I mean Senator Allard. I do not know if I have promoted you
or demoted you.
[Laughter.]
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman. You gave me more
than one job there.
Chairman Shelby. I will give you two jobs.
Senator Allard. That is for sure.
First of all, I would like to thank you, Mr. Chairman, and
I would like to thank Secretary Snow in particular for
appearing before the Committee today to discuss international
economic and exchange rate policy and its impact on the U.S.
economy.
The Treasury's report is required under the Omnibus Trade
and Competitiveness Act of 1988 and reviews the effects that
significant international economic developments have had on the
United States and foreign economies.
The report also evaluates certain factors that may bring
about these economic developments. I am pleased that this
year's report indicates China's desire to move forward to a
more open economy with a flexible exchange rate.
However, it is important to remember that there are many
factors that contribute to our current trade relationship with
China, not just the currency valuation issue. To attribute the
source of our trade difficulties with China solely to the
matter of currency valuation would be foolhardy and, frankly,
much too simple.
While a more aggressive United States foreign policy with
China may be necessary, I believe that it is not the job of the
Senate to intervene by threatening legislation. Stricter World
Trade Organization rules regarding China's membership is one
option that needs to be explored further. This can be done
through the WTO Dispute Settlement Process or by adjusting what
many would consider existing rules that are entirely too
lenient.
The United States is committed to promoting and encouraging
free and open markets, providing the ability for capital to
find its most productive home. This flexibility implies that
markets in goods and services will see growth beyond national
boundaries.
In order to see that the United States is not at a
competitive disadvantage with other countries, policymakers
need to see that Americans stay ahead of the curve with top-
notch education, innovation, and research and development.
I feel strongly that the United States must have a
comprehensive and consistent policy when dealing with China,
and I look forward to hearing from you, Secretary Snow, on the
Administration's progress over the last year and their plans
for advancing in that momentum.
Secretary Snow, thank you again for appearing before the
Committee, and I look forward to your testimony.
Chairman Shelby. Senator Dole, former Secretary Dole,
twice.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Mr. Chairman, and thank you,
Secretary Snow, for joining us here today. I want to commend
you and your colleagues at the Treasury Department for your
work on this recently released report. This report is a good
outline of the problems inherent to the Chinese currency peg.
Since we first spoke about this issue in 2003, you have
recognized my strong interest in the Chinese currency peg, and
you have shown a sincere willingness to keep me informed about
your progress, including the call from China that you made,
which I appreciated very much, when you were there discussing
this issue with your counterparts.
In the 1980's, as President Reagan's Transportation
Secretary, I had my own experience negotiating with the
Chinese, and that was an interesting time. We were negotiating
a number of issues. One was maritime, for example, but also I
met with the Director General for Aviation while I was there,
and we discussed a United States airline opening an office in
China.
Now, this had been brought up again and again over a long
period of time, and every time this subject came up, we were
told, and others before me, that the office ``would open
soon.'' Unfortunately, as I say, that existed over quite a
period of time--``soon.'' And when I was not able to pin down
the Director General as to what ``soon'' meant, I suggested
that I would just leave behind one of my Assistant Secretaries
for Transportation until the office opened. And within 5 days,
the office was opened in Beijing.
Now, while I know your negotiations are far more
complicated and far-reaching, with great ramifications for the
international monetary system, I must say that my experience
left me with the impression that the Chinese are sometimes
reluctant to follow through unless real pressure is applied.
Given this fact, our message to the Chinese must be an
insistence on action now.
We are all familiar, of course, with the manufacturing job
losses that have hit us on a nationwide basis, and certainly
that has been very true in my State of North Carolina, where we
have had many job losses over these recent years. Available
jobs in the textile and furniture industries have been cut in
half since 1998. Earlier this week, I met with John Bassett,
who is President of the Vaughn-Bassett Furniture Company, and
he informed me that a full bedroom set imported from China
sells for $399 in North Carolina, and his company must pay $461
just for the raw materials to make the same bedroom set in
North Carolina. Now, that is astounding. The peg on the Chinese
currency is a large part, I believe, of what makes that
possible.
Textiles and furniture are not the only industries affected
by the unfairness of the peg. North Carolina computer software
companies are also deeply concerned about this issue, as well
as high-tech manufacturers. Just last week, Art Rutledge,
President of Fawn Electronics, with about 100 employees in Elm
City, North Carolina, was in my office. He explained that
because the yuan is so undervalued, the materials for one small
printed circuit card, which they manufacture, that uses about
five different parts, would cost them $1.98 in North Carolina.
Unfortunately, we can buy the finished card from China for
$1.57.
These business leaders tell me that they can compete with
anyone, given a level playing field. The Chinese currency peg
has given Chinese manufacturing an advantage that cannot be
explained simply by their lower cost of labor, which we hear
about so often. The finished product cannot cost less than the
raw materials. That just does not make sense.
Secretary Snow, you have moved the bar with this recently
issued Treasury report, and I appreciate that. We have moved
the bar here in the Senate. While 2 years ago we were calling
for a freely floating yuan, today all we ask is that it simply
be revalued. That is why I cosponsored an amendment to the
State Department authorization bill to pressure the Chinese to
revalue. Sixty-seven Senators voted in favor of this amendment,
and only 2 weeks ago, Senators Snowe, Voinovich, and I
introduced legislation that would update the technical
requirements in the law for designation as a country that
manipulates the rate of exchange between their currency and the
dollar. I think it is clear that this is not an issue that the
Senate is willing to wait on. Given all of the evidence that
has been available and referenced in this report, I frankly am
astounded that the Administration continues to report that the
Chinese peg is not currency manipulation. While I appreciate
all the steps that the Administration has taken thus far, I
think it is time to redouble these efforts.
In this report states, ``It is now widely accepted that
China is now ready and should move without delay in a manner
and magnitude that is sufficiently reflective of underlying
market conditions.'' Everyone here agrees with that, Mr.
Secretary. Now let us make sure that the Chinese back up their
words with actions.
Thank you, Mr. Secretary. I look forward to your testimony
because this is a critical issue to the people of North
Carolina, and it is a critical issue to the United States as a
Nation. Thank you Chairman Shelby.
Chairman Shelby. Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman for holding the
hearing. I want to thank our Secretary of the Treasury for
being here, and I want to make a few points. Obviously, the
Secretary and I have talked both publicly and privately about
this issue ever since he became Treasury Secretary.
First, I would say this: It becomes clearer and clearer
that China wants the advantages of free trade and not the
responsibilities. They play half the game. When they have an
advantage, they are all for free trade. When they have a
disadvantage, they come up with all sorts of reasons, excuses,
or just abject violations of trade rules to avoid it. And I
will argue this: As the global economy expands and free trade
becomes more and more important, no matter where you live in
this country, if there is not a feeling that it plays fair, we
will never get a U.S. consensus or a world consensus for it.
And as long as China is allowed to do what it has done, they
set back the cause of free trade.
I am utterly amazed. It is not business people, it is not
practical people who oppose our legislation. They may say, hey,
can you do it in a nice way? But all the nicer ways have
failed. It is the academics and editorial writers. But they do
not get it. They can afford to sit there in the ivory tower and
say everyone should just play by the rules. They do not
understand the political reality that you cannot ask one side
to play by the rules while the other does not, and all the
world shrugs their shoulders and says, well, they do not have
to.
China is no longer a Third World country. It is a major
player on the world economic scene. And it is a different
situation than it was 10 or 15 years ago.
And it is issue after issue. It is the theft of
intellectual property, which they do nothing about. Those are
our crown jewels in America--intellectual property. And if you
believe, as I do, that people should be recompensed for it,
whoever they are, whatever Nationality, to let them just
violate these rules and they shrug their shoulders and say they
cannot do anything, bunk. They do not want to do anything.
And how about all the companies that are just excluded? I
know company after company in my State, and my country, where
China does not let the good in. And I have told the Secretary
some of these stories. It is big companies, it is little
companies. China is not a free trading country. They are
mercantilist country. Their goal is to increase their balance
of trade and bring jobs and wealth into their country no matter
what the consequences. And in the long-run, they do better by
playing by the free trade rules, but they do not.
And so the currency manipulation is the area that has
become the focal point, not because it is the only one but
because it is the one that affects everything across the board.
My colleague from North Carolina mentioned textiles and
furniture, which are labor-intensive industries, and then some
kind of computer--what was it? High-tech, which is obviously an
idea-centered industry. But in all of them, my business people
say the same thing to me. They said: We will compete against
lower labor costs and everything else, but when you put a 27.5-
or 30-percent barrier in the way, then we cannot compete.
I would disagree, however, with my friend from North
Carolina in one way. I am not willing to settle for just a
revaluation of 5 or 10 percent and say never mind. The Chinese
have to let their currency float. It is a tenet of free trade.
When balances of trade become too great in one direction, when
currency floats, there is a wash-back, and the whole situation
gets straightened out eventually. It is not something that is
optional. If free trade is to work, currencies have to float.
And so while I certainly do not demand--and Senator Graham
and myself, who have put our bill forward, which Senator Dole
referred to that got 67 votes, we do not demand that they let
it float immediately. We need a plan and then we need progress
toward the plan. That is why our legislation, even if it were
to pass, gives the Chinese a chance to put out a plan before
any kind of tariff is imposed.
Finally, I want to salute you, Mr. Secretary. I think for
the first time, the Administration has called it like it is.
They have said--or almost called it like it is. They have said
there are real problems here, and they said if China does not
change, we will call it currency manipulation. Well, my view is
if it quacks like a duck and walks like a duck and swims like a
duck, it is a duck. They are manipulating their currency. We
all know it. And I do not mind you moving in that direction,
but let us not delay much further.
The Administration has now stepped into the batter's box.
We had to push you a little bit, but you are there. Now you
have to swing at the pitch. And you will benefit not just
American industry but the whole construct of world trade when
you do.
So, I want to ask unanimous consent that the rest of my
statement be put in the record.
Chairman Shelby. Without objection, so ordered.
Senator Schumer. And thank you for being here.
Chairman Shelby. Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman. Mr.
Secretary, I join with other Senators here in welcoming you to
the Committee to discuss this issue. And, frankly, I want to
associate myself with the comments of the Senator from New York
and the Senator from North Carolina and others who have spoken
here today about the importance of making certain that we
develop the right trade and monetary policy with China.
I was a supporter of the legislation that was voted on in
the Senate and for a long time have been a strong proponent of
doing everything we can to cause China to stop its currency
manipulation and to stop pegging the yuan to the U.S. dollar.
I am concerned, however. I am concerned about what the
proper U.S. response should be to the overall issue. The
Senator from New York indicated that the focus on the currency
manipulation issue is where the focus of the day seems to be,
but that is not the only issue. And, frankly, it is not an easy
solution. As you are well aware, the Chairman of the Federal
Reserve, Alan Greenspan, has indicated that, along with many
others, he expects to see China move in this direction, but
does not expect that that move will necessarily have a
significant positive impact on the U.S. economy because of the
rise in domestic prices and potential other dynamics in terms
of where the United States will get the imports that we are now
getting from China if that reduces Chinese imports.
It seems to me that we have a much larger issue here than
simply the currency manipulation issue, and it is an issue of
such magnitude that this Congress, this Administration, and
this country has to develop a broad, overall policy of how we
are going to deal with the current trade and monetary policies
that we see emanating from China, one of the most powerful
economies in the world and one which will continue to grow.
So, anyway, I just wanted to say to you I appreciate your
willingness to come and meet with us today and report to us. I
appreciate the report that has just been issued. And I do
support the efforts of the Administration to try to work with
China to get it to move in the direction of fair and free trade
and proper monetary policy. But I really hope, as a result of
this hearing and the other efforts that we are all engaged in,
that we can get a much broader and more focused action plan put
together or game plan, if you will, as to what U.S. policy
should be, not just with regard to the currency manipulation
issue but with regard to the entire panorama of how we should
deal with a nation like China, which is acting in the ways that
have been described here, that literally take advantage of
proper WTO policies and U.S. trade policies when they benefit
them and then ignore them and erect trade barrier and establish
monetary policy that is detrimental when it benefits them. And
I know that this is a tall order, but as a Nation, we have to
develop an overall policy that does much more than just
determine what we will do with regard to currency manipulation.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman, and,
Secretary Snow, we are pleased to have you back before the
Committee. This is obviously a very important subject. I notice
the Administration is moving a little bit on this issue, but I
am not sure it has moved enough yet. And I do not see how you
could do anything but move on this issue given the evidence
with respect to currency manipulation, which is, after all, the
focus of this hearing under the legislation passed by the
Congress.
It has been my view for some time that nations, first and
foremost China, but other key economies as well in Asia, have
been manipulating their currency to gain unfair competitive
advantage in international trade within the terms of the 1988
Trade Act.
First, China, Japan, Taiwan, and South Korea are all
running material global current account surpluses and
significant bilateral trade surpluses with the United States
within the terms of the 1988 Trade Act, in my view. I have a
chart here that shows the global current account surpluses and
bilateral trade surpluses each of these countries is running
with the United States. And as you can see, China's trade
surpluses in particular with the United States now, in the most
recent 12 months, $173 billion, 10.5 percent of GDP. Japan is
78.1; South Korea and Taiwan.
Now, the size of China's bilateral trade surpluses with the
United States relative to the size of its economy is
particularly striking. Furthermore, each of these countries has
been engaging in sharply increasing accumulation of foreign
currency reserves, principally dollars. As the following charts
will illustrate, the first chart shows the growth in China's
stock of foreign reserves, $215 billion over the past 12
months. This is just an incredible run-up in the stock of
foreign reserves on the part of China. The second chart shows
the growth in Japan's stock of foreign reserves. It has tailed
off. It has only been $11 billion over the past 12 months, but
that follows very sharp increases of $171 billion in 2004 and
$202 billion in 2003. So we have had a tremendous run-up. And
the next two charts show the same increase in the stock of
foreign reserves held by South Korea, and then by Taiwan.
Now, to get some comparison, because I do not think the
same kind of manipulation is taking place in the European
Union, the next chart shows that the stock of foreign reserves
held by the European Union, it has actually declined over the
last 12 months.
So it is a very sharp contrast, what has been happening
with respect to the countries in Asia accumulating foreign
reserves compared with the European Union.
The final chart I want to show is a consequence of these
reserve accumulations for the value of the currency relative to
the dollar. The euro has experienced a significant appreciation
against the dollar over the past year. That is the blue line at
the top that has been rising. The currencies of Japan, South
Korea, and Taiwan have experienced a significantly smaller
appreciation. Those are these three, which show some
appreciation. And the value of the Chinese currency, since it
is pegged to the dollar, as represented by the horizontal axis
of the chart, has not appreciated at all of course since it is
pegged at a fixed figure. So it is an absolute straight line
across the bottom. So this economic theory that the currency
appreciates, it helps to straighten out the trade imbalances
and so forth is just not working.
The trade imbalances are breathtaking. We have the figures
here on what has happened to the U.S. trade imbalance. This is
the U.S. trade deficit. This is 2001, when your watch began,
and this is what has happened to the trade deficit, and the
current account of course more or less parallels that
obviously. That is what has happened to the current account.
I do not think there is much doubt or ambiguity about what
is taking place. Each of these countries is intervening
actively in the market to purchase dollars in order to depress
the value of its currency. The United States ran trade and
current account deficits last year of more than $600 billion,
and that was by far the largest we have ever done.
The four countries collectively account for over 40 percent
of the U.S. trade deficit. We have now accumulated an external
debt in excess of $2.4 trillion, over 20 percent of GDP.
Only yesterday, the Organization for Economic Cooperation
and Development released its semiannual economic outlook. The
OECD forecasts that the U.S. current account deficit would
continue to rise, hitting nearly $900 billion or 6.7 percent of
U.S. GDP in 2006. The Chief Economist of the OECD told the
Financial Times, ``We are not saying there will be a doomsday
tomorrow morning, but because the adjustments to global
imbalances are relatively slow, we are running the risk that an
accident will happen. That is where we are. Time is running
out. The numbers are getting big, big, big.''
It seems to me if we are going to make any progress we have
to address this directly, this issue of currency manipulation.
Each of these countries is a member of the WTO. All but Taiwan
are members of the IMF. Condition of membership in both
organizations is not to engage in currency manipulation for
competitive trade advantage. Clearly, the intervention has been
most egregious in the case of China. There is reason to believe
that the other countries in the region, for competitive trade
reasons, are hesitant to allow their currencies to appreciate
unless China appreciates first. They are standing in the shadow
of China, and there is considerable, as I understand it, expert
opinion that if China moves they will be able to move as well
and get this thing into better balance.
Mr. Secretary, we have differed in the past over how China
should try to adjust. You have consistently said, well, we have
to move them toward floating rates, and some of us have
suggested to you that there is little expectation that they
would let their currency float freely because there is
considerable concern of the impact on the banking system, and
that therefore, the way to approach this is to get a
substantial upward revaluation of its currency in terms of the
peg, rather than to allow its currency to float.
I notice in The Wall Street Journal only yesterday, you
say, and I am pleased to see this statement, I want to say to
you, ``Unfortunately, the debate on China's currency regime is
clouded by a number of misconceptions of U.S. policy.'' I am
not sure we misconceive them. I think you may be--I think you
are changing U.S. policy. ``First, we are not calling for an
immediate full float with fully liberalized capital markets.
This would be a mistake at this time. China's banking sector is
not prepared for such a move today. What we are calling for is
an intermediate step that reflects underlying market conditions
and allows for a smooth transition when appropriate to a full
float.''
Actually, I regard that as a significant step in the right
direction on the part of the Administration in terms of what we
should be seeking and what our policy should be. This notion--
the Chinese keep saying, ``Well, we want to go to a flexible
system,'' you have been saying. ``You should go to a flexible
system,'' then all the experts say, ``Well, if they go to a
flexible system they are going to have a banking crisis. They
cannot go to a flexible system because the banking system
cannot withstand it.''
So we have this kind of kabuki--wrong country reference--
but we have this kabuki going on between us and the Chinese on
how to remedy this problem. Now, I gather you are moving away
from that position, and it seems to me, obviously, they can
reset the peg. How much they do it of course is a critical
question, but that would help to address this issue.
Thank you very much, Mr. Chairman.
Chairman Shelby. Senator Hagel. He is not here.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Time is far spent. I will forego, Mr.
Chairman, and look forward to listening to the Secretary.
Chairman Shelby. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you very much, Mr. Chairman.
Mr. Secretary, thank you for being with us, and thank you
for your service to our country. You have made some
considerable sacrifices to be here, and we appreciate that very
much.
You also arrive at an auspicious time when it is nice to be
talking about something other than judges, and looking to the
long-term economic future of our country. So, I am sure we are
delighted to be focused on that here today. I know that I am.
This whole issue of globalization, Mr. Secretary, that this
in some ways relates to, is one of the great challenges of our
time, the move of our economy from an agricultural based
economy to an industrial one, then from an industrial one to a
service-based economy, and now looking to the future and
thinking about what our comparative advantage going forward is
going to be.
I have broken this down into three parts. First and most
important, we need to have a positive strategy about what we
can do more quickly with higher quality and less expensively
than anybody else on earth. What are we going to do to grow our
economy and to empower our citizens with research and
development, education skills, and all the other things
necessary to be globally competitive.
Second, what do we do about those who are dislocated
because of globalization, through no fault of their own, people
who need to get back on the ladder toward being upwardly
mobile? We have an obligation to them than to say, ``Well, it
is too bad for you. You are on the scrap heap of history and we
are moving on.'' We need to put into place ways in which
through hard work they can get back on their feet, moving
forward again.
And then third, Mr. Secretary, as we have discussed before,
when we embrace the difficult decisions to define our
comparative advantage, when we embrace open and free
competition and make the hard choices, the sacrifices, work
hard, think smart, and all the rest, what do we do when there
are others who choose a different path and instead engage in an
industrial policy, or try and cheat on the rules to give
themselves an artificial advantage? We owe it to our workers
and businesses that when they work hard, think smart and are
productive, that the fruits of that effort not be stolen from
them by those who would break the rules by cheating.
So the question is, what do we do in a situation like that?
And the answer cannot be nothing, cannot be protectionism but
it cannot be nothing. And so in some ways we are gathered here
today to answer the question, what do we do when countries seek
to gain an unfair advantage for themselves through artificially
manipulating their currencies? As you heard today, and I agree,
I think we have to take a stand.
I know it is a difficult challenge. In some ways it
requires you to not only be the Secretary of Treasury but also
an international diplomat as well. Our relationship with China
is an essential one, one of the most important going forward in
this century, and we need to be sensitive to the fact that they
have concerns. Particularly, how do they reallocate
approximately 140 million excess workers in agriculture to
other lines of work? What do they do about surplus workers in
their state-owned enterprises? That will require some real
transitions within China. And they understandably have a
concern about stability within their country. We need to be
sensitive to that.
But our sensitivity to the concerns for stability in China
cannot lead us to a place where we unfairly displace hard-
working Americans here at home. That simply would not be right.
So that is the balance that we need to strike, and it is one
that we look forward to having a good dialogue on here today,
and how do we pursue our comparative advantage economically?
How do we do justice for individual Americans and still retain
good relations with countries that we need to to secure our
national security interests and others moving forward?
I thank you for your time, and would just say in
conclusion, we owe it to individual Americans to ensure that
there is justice in the global marketplace. I think that is
really what this hearing is all about. Thank you for your time.
Chairman Shelby. Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. I have no statement at this time. I just
want to welcome the Secretary and thank the Chairman for
holding this important hearing.
Chairman Shelby. Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. This is an
incredibly important issue that we are speaking about again
today. I want to welcome the Secretary for coming before us
again, several times now as I have been a Member of the Banking
Committee, and each time this issue has become more critical,
more severe. It is really now on par with health care costs as
an item that is crippling economic growth in our country and is
of great concern to manufacturers as well as farmers and all of
the business community in my State of Michigan.
I, frankly, Mr. Secretary, have to share the concerns of
many of my colleagues who are deeply disappointed with the
Treasury report that was released on Tuesday. I believe that
the Treasury Department has failed to do what is right and
obvious as the report relates to China and Japan. The report
states that no country met the technical requirements of the
law governing manipulation, and we all know it is occurring. In
Michigan, we would say that is too cute by half. I mean the
reality is we know it is occurring, but yet we are told it
technically does not meet the requirements as we every day are
losing jobs in Michigan and across the country.
Most economists agree that China's currency is undervalued
against the dollar so it is difficult to see why once again the
Treasury Department is unwilling to state the facts. In fact,
given the clarity of the problem I am led to believe that
something other than facts are driving this reluctance to find
violations. I am wondering if it is the fear of retaliation by
the Chinese or the Japanese on our goods and services. Is it
because, as many of us have said, that we are becoming more
dependent on these two nations to shoulder more and more of our
budget deficit? Does this relate to the reluctance to move
forward? I think these are serious questions and serious
issues.
Many of us have warned the Administration that continued
large budget deficits would eventually limit our ability to
address trade problems, and here we are. The day has arrived I
believe.
I am certain that much of the discussion today will focus
on China, but Japanese manipulation is a problem that, Mr.
Secretary, I hope we do not lose sight of. In Michigan, where
auto manufacturing makes up such a large part of our economy,
Japanese manipulation is a major and ongoing concern, and I am
doing everything I can to make sure that it is addressed.
The decision by the Treasury Department to again go easy on
China and Japan will cost the State of Michigan jobs at a time
when unemployment remains staggeringly high. Last month, United
States gained 274,000 jobs, but in Michigan we added 7,500 to
our unemployment rolls. Specifically, China's currency policies
have cost the United States economy over 1\1/2\ million jobs in
the last 15 years, and in Michigan that is over 51,000 jobs.
That is why this is such a critical issue for us. These job
losses are damaging diverse sectors, not only auto
manufacturing, which is critical, but farming, things like
apple juice, as well as auto parts and furniture and boat
manufacturers. I can go through a long litany of the types of
businesses that are being impacted in Michigan, and the jobs
that are being lost as a result of that.
The response that the report gives to these facts is that
the Treasury Department is ``continuing to engage actively with
economies to encourage in both bilateral and multilateral
discussions flexible, market-based exchange rate regimes
combined with a clear price stability goal and transparent
systems for adjusting policy instruments.''
I think for all of us today listening to those words, it is
murky at best. What it means, of course, is that we are talking
to the Chinese, we are talking to Japan, and if talk would make
this go away, it would have been solved a long time ago. I do
not question the sincerity of the talks, but the reality is
that talking has not done it, and it, in my opinion, will not
get us the results we need.
The Treasury report dedicates one sentence, one sentence
out of 17 pages, to the negative effects of currency
manipulation on U.S. workers and U.S. businesses, one sentence,
but repeatedly describes why manipulation would be bad for
China. I am certainly not opposed to being concerned about
China, but as colleagues on both sides of the aisle have
expressed we are deeply concerned about American businesses and
American workers.
First let us be clear about it, that currency manipulation
kills American jobs, and it is illegal under the WTO and IMF
obligations. Even foreign exchange markets are sending clear
signals that China in particular should revalue its currency. I
believe there is a strong case for pursuing action against
China in both the WTO and the IMF. China's exchange rate policy
frustrates the intent of the WTO and can be viewed legitimately
as providing an illegal subsidy to exports and imposing an
illegal tariff on imports. Mr. Secretary, we need to crack down
both on China and Japan and make sure they are playing by the
rules.
Finally, I would just indicate, and would welcome your
feedback, I have introduced legislation, along with Senator
Lindsay Graham and Senator Bayh, who has additional legislation
which I think is very important. We have introduced legislation
that would create a chief trade prosecutor within the Office of
the U.S. Trade Representative. This is an issue and actually a
suggestion that came from the discussions with the United
States-China Commission members, and it would set up for the
first time someone whose job it is to police our trading
partners and to basically speak out and take action on behalf
of American manufacturers and workers when there are unfair
trade practices like currency manipulation.
I am hopeful that we will be able to move that forward. I
think it is incredibly important that we not wait for a report
every year, Mr. Chairman, but that we have someone who is
watching out on a daily basis for our businesses and workers,
and working hard every day to create a level playing field.
So thank you again, Mr. Secretary, for being with us, and
Mr. Chairman, for holding the hearings. I cannot stress enough
the sense of urgency that the business community and the
workers in Michigan have regarding this issue of currency
manipulation and the larger issue of having a trade policy that
creates a level playing field so we can compete.
Thank you, Mr. Chairman.
Chairman Shelby. Secretary Snow, we welcome you again to
the Committee. Your written testimony will be made part of the
hearing record in its entirety. You proceed as you wish.
STATEMENT OF JOHN W. SNOW
SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Secretary Snow. Thank you very much, Mr. Chairman. It is
always a pleasure to be here and to continue the dialogue that
now goes back well over 2 years with this Committee on a
variety of important issues, of which none really is more
important than the one that has been so well-addressed by your
opening comments this morning, and that is the global
imbalances.
It is critically important that we address these global
imbalances and that we understand them, and that we address
them in the appropriate and right way, and China is part of the
adjustment process to deal with the global imbalances.
We have said that it is imperative that China move to
greater flexibility of its exchange rate. It is only recently
though that we have concluded that they have taken sufficient
preparatory steps to be able to introduce exchange rate
flexibility, greater exchange rate flexibility without untoward
risks to their own banking system and to their own financial
system.
One reason they are where they are, I think, is the 2-year
engagement that we have had with China, an engagement that has
secured from them the commitment to move to flexibility, has
secured from them the acknowledgement that flexibility is there
a float, in other words, is there a long-term objective, and
intermediate steps that are really quite remarkable in
preparing the way, in putting in place a strong bank regulator
and seeking to recapitalize the banks and opening up some
financial market opportunities for non-Chinese firms, widening
the amount of capital the Chinese can take out of the country,
and that non-Chinese can bring in, opening up opportunities for
non-Chinese financial firms to engage in their economy.
All of that is designed to strengthen their financial
infrastructure so that they will be able to implement a greater
flexibility to their exchange rate. They understand the need, I
am convinced, to move to greater flexibility, and they have
taken a number of steps to prepare the way.
What is different with this report from our prior reports
is that we now say, you are ready and it is time to move. And
we have clearly indicated in this report that since you are now
ready, you have now taken the positive steps to put yourself in
a position to do it, failure to do it will weigh very heavily
on us when we do our next report. That is really the principal
message of this report as it relates to China, Mr. Chairman.
We have appointed a very talented and able negotiator as
the Treasury Secretary's representative, a former Assistant
Secretary of the Treasury, Olin Wethington, who is now in
Beijing, who will be spending an enormous amount of time,
energy, and effort--and this is an extraordinarily capable
individual--in working with the Chinese authorities, in helping
the Chinese authorities come to the conclusion that now is the
time to put in place the appropriate flexibility.
One very encouraging note on this is the fact that the
Chinese have indicated their interest in having a forward hedge
mechanism put in place, in other words, a derivatives market in
their currency, and they have engaged the Chicago Mercantile
Exchange, the leading currency derivatives market in the world,
to enable them to do that. You do not put in place a forward
hedge. You do not put in place a derivatives market. You do not
do the effort to prepare for a derivatives market unless there
is some interest in moving to flexibility.
But having said all of this, let me say, Mr. Chairman, I am
disappointed. I know you are disappointed. The Administration
is disappointed that we have not seen action, and we are going
to stay on this until we get action. I know from your comments
in here today and I know from personal conversations with many
of you the intensity with which you address this issue. And it
is absolutely essential that China adhere to the rules of fair
trade. It is absolutely essential that China play by the rules,
and whether it is opening markets, or whether it is enforcing
intellectual property rights, stopping the stealing and theft
of other people's ideas, or whether it is moving to a currency,
we are committed to seeing that they play by the rules.
The larger issue that we are dealing with here is, of
course, the consequences of a major player in the international
global trading system who does not play by the rules and
getting their attention to assure that they do play by the
rules because the consequences of not playing by the rules, of
course, are to invite protectionist measures that I think are
unwelcome, untoward and damaging and destructive. So it is
awfully important for the appropriate actions to be taken here
to ward off things that Senator Allard said none of us want to
see come to be.
While the Chinese currency is an important component of the
global imbalances, it is not the only one. Global imbalances
start with the recognition, I think, that the United States is
growing at a rate that is far higher than our trading partners,
particularly our euro zone trading partners and Japan.
With our higher growth rates we are creating more
investment opportunities in the United States and we are
creating more disposable income. Our higher investment
opportunities, giving our relatively low savings rates, mean
that we have a current account deficit. That is what a current
account deficit is, our level of savings opportunities compared
to domestic savings. We need to work on both sides of that. We
need to save more in the United States. It is critically
important that we increase our savings rates. It is also
critically important that the euro zone and Japan and our other
trading partners put in place policies to grow faster. The
framework we are dealing with encompasses all of those points,
faster growth, stronger growth, better growth with our trading
partners, higher savings rates in the United States, including
reducing dissavings through deficit, and I think we are on a
good path there to reduce the deficit. The recent numbers were
very encouraging.
And finally, China's part, and China is not just China in
this respect, China is of course, as I think the Chairman said,
most of Asia that ties itself to China for competitive reasons,
adjustments of the yuan to get it into closer alignment with
underlying demand and supply realities.
Mr. Chairman, we are going to stay on this one until we see
the final result that is reflected in China having a flexible
currency, reflecting demand and supply conditions.
Thank you very much.
Chairman Shelby. Mr. Secretary, the Treasury report stops
short of labeling China's actions as currency manipulation. You
get up to the brink, but you do not cross it. The report also
notes that a peg or intervention does not meet the definition
of currency manipulation and that the IMF concurs in this
assessment.
Mr. Secretary, you are getting close, and I hope that you
will finish your work. What condition, Mr. Secretary, or set of
conditions would meet the technical definition of manipulation?
In other words, what is it going to take?
Secretary Snow. Well, as I suggested, Mr. Chairman, the
fact that China is now ready, has now prepared the way, and----
Chairman Shelby. To do what?
Secretary Snow. To move to flexibility, that they now have
the technical capability of implementing a flexible exchange
rate.
Chairman Shelby. Do you believe they are going to do that?
Secretary Snow. Yes, I do.
Chairman Shelby. And do you believe they are just going to
repeg their currency?
There is a lot of difference between floating their
currency and repegging it, as you well know, Mr. Secretary.
Secretary Snow. I do not think it is in our interest or
their interest for them to go immediately to a full float. What
we like to see them do is take steps in a manner and magnitude
that closed the gap between where they are and a float. In
other words, I see them on a path to a float.
Chairman Shelby. Mr. Secretary, what actions, honestly,
candidly, will China need to take in the next 6 months to avoid
a designation of currency manipulation in your Treasury report
to the Congress which is this coming October, 6 months from
now? I know you are getting close, but what is it going to take
on China's behalf to avoid you designating them?
Secretary Snow. It is always a fact-based question and it
is a complex question and a difficult question, but current
trends, if current trends continue, which is large current
account surplus with the United States, very large and growing
surplus with the world, continuing capital inflows, and build
up of large reserves, all of which are the current trends, with
inflows of so-called ``hot capital'' which reflect clearly the
sense that the currency is undervalued, those sorts of trend,
if continued and no relief for them is put in place in the form
of a flexible exchange rate, our certainly the things we would
look at in making our next determination.
Chairman Shelby. Do you believe a timetable has to be
satisfactory action by the Chinese with the penalty being such,
timetable such as ineligibility to continue IMF assistance, WTO
membership, or what? What are you thinking about here?
Secretary Snow. I am thinking we have their attention and
they are going to move. I really believe that.
Chairman Shelby. It will be interesting to watch. In about
six months, you will be back here and we will see what happens.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman. I first want to
thank you for your comments and questions. I think this is
really the core. How do we get there? Again, it is nice to have
words that are inching along, getting better, but how do we
really get to the point where we are going to call it as it is
happening?
I know a number of colleagues will speak about China, and
so I want to speak for a moment about Japan because both of
these are very important, and I support comments that
colleagues on both sides of the aisle have spoken to as it
relates to China and what is happening, and I think that is why
you saw 67 Members on both sides of the aisle vote for the
Schumer-Graham proposal on the floor of the Senate, and I
expect the same kind of a vote in July at this point.
But Japan, while they have not been fiscally intervening in
global currency markets for more than a year, they have been
involved in really verbally intervening, Mr. Secretary, and
making threats that if the yen continues to strengthen against
the dollar, they will resume direct manipulation of their
currency, and we have a number of quotes to that effect
including just last week from the Bank of Japan, officials
saying that they believe that Chinese revaluation would be an
unforeseen sudden event that pushes up the yen. Therefore we
will have an excuse for carrying out a yen-selling
intervention. This was on May 17.
My question is, now that you have chosen to warn China for
the first time in this report--and that is a positive thing--
why have you not also warned Japan that any resumption of
fiscal interventions of remarks from the Ministry of Finance
and the Bank of Japan will result in their being named as a
currency manipulator as well?
Secretary Snow. Senator, we are in continuous discussions
with the Japanese Finance Ministry and their Central Bank, and
our views have been expressed to them any number of times, the
view that the world trading system functions best with their
reliance on open trade and free trade under rules, with free
capital flows and currency arrangements values set in opening
competitive currency markets with interventions kept to a
minimum.
Now, since I think it is March 2004, March 16, actually of
2004, we have not witnessed any formal interventions, and the
Japanese have signed on to that G-7 global framework, which
calls for reliance on flexibility, and of course, over the last
half of the last 6 months of last year or so, their currency
had a fairly significant appreciation.
I think there is a pretty good understanding of what our
policies are and what satisfies the requirements of being a
good trading partner. We do not want to see interventions
occur. We are opposed to interventions. We have made that
clear. There have not been interventions for a considerable
period of time. Their currency has been appreciating, so while
we seem to be on a good course, we are going to continue to
carefully monitor that, and we are going to continue to
reinforce our views.
Senator Stabenow. Mr. Secretary, with all due respect
though, I have in front of me 6 different quotes, one as of
last week, and all of them since January, talking about they
are going to monitor, they are going to take appropriate action
if necessary, will have an excuse for carrying out a yen-
selling intervention. They go on and on, we are ready to take
proper action against excessive moves and so on. So, I would
just suggest again that letting them know our policy obviously
is not enough. This is absolutely critical. When I talk to
those in the auto industry in Michigan and around the country,
they certainly are concerned about China, but they say, what
about Japan? This is the area that has been so critically
important to us and directly relates to losing jobs, which we
cannot afford to lose any more.
I want to ask one other question if I might because I think
this relates to both of these things. Because I am very
troubled by the fact that there is a reluctance to cite China
and Japan as engaging in currency manipulation, and I would
like you to address the fact that it is no secret now that
Japan and China are funding a large part of our national debt.
Together they are funding about half of the foreign debt
holdings of our country, and I see adding another $400 billion
a year to the national debt when we look at this budget,
through a combination of tax cuts and increased spending, while
no one is talking about what this does to us in the
international arena.
So, I am wondering if you see us continuing down this road,
what relationship this will have to our ability to act, when on
the one hand we see China and Japan doing things that undercut
American businesses and undercut American workers. On the other
hand, they are holding more and more of our debt, alarmingly
large amounts of our debt. Can you speak to how much this chart
relates to our ability to do more than just talk to them about
issues of fair play and issues related to our trade situation?
Secretary Snow. Yes, Senator, of course. China and Japan
and the other countries you witnessed there, do have sizable
holdings of our national debt. There is no doubt about it. But
that debt is widely held, and held on a very diversified basis.
And while it is something we monitor, it is not something that
is particularly troubling to me. The governments of those
countries, including South Korea, Japan, and China recently
have issued statements saying that they are not going to pursue
diversification of their dollar holdings. Why do they hold
dollars and dollar-based assets? Because they are the best
assets to hold. It is in their interest to hold U.S. dollar-
based assets. We have the deepest, the most liquid, the most
efficient capital markets in the world. It is a great source of
strength for America that our capital markets are the deepest,
most liquid, and efficient in the world, and that investments
in those markets provide the best risk-based returns in the
world.
So, no. As long as we keep our capital markets working, as
long as we keep productivity high, as long as we keep growth
high--and I was pleased to see that revised number on the first
quarter coming in at 3.5 rather than 3.1--as long as we sustain
above-normal growth, high productivity, respect for capital,
and maintain these deep, liquid markets, I have great
confidence in our capital structure and our ability to fund our
obligations.
Senator Stabenow. Mr. Chairman, I know my time is up, and I
thank you for your response. I would just say that I have a
very different view about whether or not adding to our national
debt and having a trade deficit that is even larger than our
national debt, which is the largest in the history of the
country, and having more and more of it held by countries like
Japan and China, whether or not this gives strength for
America, and I would suggest that there are many of us that
believe it does not strengthen us and in fact puts us in a much
more difficult position to act in our own best interest.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Dole.
Senator Dole. Secretary Snow, I want to follow up on
Senator Stabenow's questions. With China's official foreign
exchange reserves at $610 billion in the second half of 2004,
how much interest does the United States anticipate it will pay
China in 2005?
Secretary Snow. Well, our all-in interest costs, the
Treasury's, are roughly about 4 percent, so it is $600 plus
billion, $25, $26 billion, something on that order.
Senator Dole. A May 21 article in the Economist states that
most economists believe China is concerning three options, the
least ambitious of which would be a small widening of the
yuan's trading bands against the dollar or a gradual shift from
the strict dollar peg to one based on a trade-weighted basket
of currencies. Do you believe this option goes far enough to
avoid designation under the technical requirements of the law?
Secretary Snow. Senator, what we have indicated that the
Chinese need to do is take steps--and these are of course
sovereign decisions; we cannot dictate to sovereign decisions
they make, we can indicate what we think is appropriate--but
steps of such a magnitude and in such a manner that they
clearly get on a path to flexibility, and relieve some of the
imbalances and distortions currently associated with the peg.
Most observers will tell you that under current circumstances
the peg results in undervalued currency. The Chinese are in the
best position though, in our view, since it is a sovereign
decision, and it depends on local reading of the economy, in
which they are far more skilled than we are in understanding
their own domestic economy and tradeoffs between job creation
and inflation and all those things you have to do for them to
make that decision. It has to be a decision to satisfy our
report that is a manner and magnitude sufficient to close that
gap in a significant way, and get that currency better aligned
with underlying demand and supply. In other words, significant
enough to improve materially the adjustment process that should
be occurring.
Senator Dole. As you are aware, more than half the loans
the banks in China have made are classified as nonperforming, a
nice way of saying that they are bad and they are not going to
be repaid. In conversations with State Department officials, we
were told that we cannot think of Chinese banks as being like
our banks, that they are more like government lending programs.
Are you concerned that these loans to Chinese manufacturers are
nothing more than government grants, further subsidizing their
exports?
Secretary Snow. Senator, the evidence is pretty clear here
that the state-run enterprises borrow from the state banks
funds that are used primarily to fund payrolls. That is not
capital going into the economy to increase long-term output.
And in that sense it is a transfer payment, not a loan. So to
call it a nonperforming loan in a sense is a mistake. The
institutions are not set up as normal banks. The Chinese
banking authorities recognize the need to deal with the dual
problem here, the problem of state-run enterprises that do not
deploy capital very well, and that need to become a smaller
part of the national economy over time because they are a
source of inefficiency, but at the same time they see a need to
fund these enterprises so people are not out on the streets. So
it is much more in the nature of a set of transfer payments
through nominal banks than it is normal banking activity.
One of our concerns is that some of the reserves of those
banks, if China were to go to an open capital arrangement, that
people would take the capital out of those institutions, and
they would go into primarily dollars which would have the
opposite effect from what we are trying to seek here, that is,
the yuan come out, they buy dollars, they drive up the value of
the dollar. So in our conversations with the Chinese we are
very conscious of that risk and we are talking to them about
the need to maintain an appropriate measure of capital control
so they do not invite these capital outflows.
Senator Dole. I know my time has expired. I want to just
ask one further question very quickly.
Secretary Snow, there are a number of farm families that
have contacted my office, people from North Carolina, regarding
the tax treatment of the tobacco quota buy-out and the producer
payments. The time for signing up expires--I think June 17 is
the deadline--and can you tell me when you expect Treasury will
promulgate its rule regarding the tax treatment of these
payments, because there are families waiting to see that in
terms of this sign-up deadline.
Secretary Snow. Senator, we agree with you. It is being
worked on, the guidance is being worked on even as we speak
here, and I would expect it to be out very soon. We will meet
the deadline.
Senator Dole. Thank you.
Chairman Shelby. Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman.
Mr. Secretary, you do not need to respond to what I am
about to say, but reading between the lines, it seems to me we
concluded that manipulation in fact has been taking place but
they have not put into place the steps necessary to make the
adjustment in an orderly way until more recently. But that
looking out over the next year, understanding that they made
those adjustment, we are going to expect something more than
lip service moving forward. That is kind of the way I
interpreted what you had to say.
I would like to follow on something that Senator Dole said,
and you answered this in general. That is, how much is enough.
You said we expected something material, to have a material
impact on these imbalances. It strikes me that half measures
here might be the worst of both worlds, that they could have an
impact upon some aspects of our economy without materially
impacting our competitive situation. So let me ask you once
again, and I do not want to play semantic game or anything, but
if their currency is overvalued--or undervalued rather by 25 to
35 percent, how do we define material?
Secretary Snow. I think, as I said, Senator, if current
trends continue and there is not action, we have sent the
pretty strong signal--you read us right--what the outcome would
be. I do not want to define ``material.'' We do have people in
private discussions with the Chinese, and those discussions are
probably better left to the discussants. But it has to be
enough to matter. It has to be material and significant. I do
not want to put quantification on ``material and significant,''
but----
Senator Bayh. Fair enough. I think the two--for others who
are listening, just to strengthen your hand--superficial steps
alone will not be enough. This issue will not be addressed
either substantively in a fair way or otherwise until we have
achieved something more than superficial steps.
Secretary Snow. Absolutely. We will not accept that as
changing the current course that China is on. It has to be
material and significant. It has to change the adjustment
process in a real way.
Senator Bayh. I apologize for having to step out. There was
a call I had to take during Senator Stabenow's questioning. I
gather she asked you about sovereignty and our concern about
whether our position in other negotiations was affected by our
need to borrow from China these days.
I would like to ask for your reaction to something. I think
it was a month or two ago there was a rumor going through Seoul
that the South Korean Government might begin diversifying out
of dollar-denominated assets, and for a period of time there
our currency fell into a free fall until the rumors were put to
rest. Several weeks after that the Prime Minister of Japan, in
some public comments, either inadvertent or not, said that
perhaps Japan should start diversifying at dollar-denominated
assets. Again, our currency went into a free fall until someone
in the Ministry came out and corrected the record.
What does that say about our position of financial strength
when a rumor in another country or an inadvertent slip of the
tongue by a foreign leader can lead to a sharp fall in
something as important to our national well-being as our
currency? Is that not a sign of weakness rather than strength?
Secretary Snow. Senator, of course, those countries, China,
Korea, Japan, have all indicated that they want to continue to
hold and will continue to hold dollar assets and do not intend
to diversify out of dollars. Currency markets tend to trade on
rumors and that is the nature of these markets. They trade both
ways on rumors.
Senator Bayh. I appreciate that, but is it not a sign of
our dependency rather than our strength and independence?
Secretary Snow. Senator, no, I would not look at it that
way. As I said earlier--I think you were out--that the
countries that hold dollar-based assets do so because we have
the deepest, most liquid, and most competitive capital markets
in the world. We talked earlier of the jewels of America. Our
capital markets are absolutely one of the great jewels. There
is nothing else like the U.S. Treasury market anywhere in the
world. There is no other market nearly as deep and liquid,
where sales can occur readily. The Treasury market trades at
over half a trillion dollars a day. So that, no, we are not in
any way beholden, if that is the question, or is our economic
policy or international policy being held hostage in any way.
Those countries are holding dollars because it is in their
interest to hold dollar-based assets.
Senator Bayh. Is my red light on, Mr. Chairman? Thank you,
Mr. Secretary. I would only observe that, in conclusion, I
understand that, but sometimes great nations make decisions
based upon something other than maximizing their financial
well-being. It is possible that some of these countries might
take a course of action that we would view as not optimizing
their finances for other reasons, and that might not inure to
our benefit. But, again, I thank you for your presence and your
service.
Mr. Chairman, thank you.
Chairman Shelby. Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
What has happened to the Japanese or the Chinese thinking
from the previous report to this report here now that you are
bringing forward where all of a sudden they are having a change
of heart? It is not entirely clear to me how we got from there
to here, and I would like to have you explain that a little
bit. And then if they do not--or if they just change the peg,
for example, and do not really go to the market, then what are
the consequences that you see for them and what do you see the
consequences would be for us? I would appreciate if you could
respond to this.
Secretary Snow. Briefly, Senator, what has changed is the
fact that we have come to the determination that, after long
engagement with the Chinese now, their financial system could
accommodate greater flexibility, that it could accommodate it
in the sense that it would not create untoward risk, systemic
risks to their financial system, particularly if they keep
appropriate controls on capital outflows. So that is the
principal thing that has changed.
We have had extraordinary involvement with them here with
technical teams of Treasury experts in China and their teams
over here, just lots and lots of work to make sure the
foundation is laid for effectively implementing greater
flexibility.
Now, you asked what happens if they just raise the currency
or raise the value of the peg by some amount? Going back to the
earlier discussion, that will not satisfy the requirements here
in and of itself unless it is material enough to get the
currency into the alignment with underlying forces that we do
not see today. In other words, virtually everybody who looks at
it says the currency is undervalued under current circumstances
by some amount.
Now, there is a wide variety of opinion on that. The only
way to really get the correct answer to that is to use the
marketplace. The only way to find out what equilibrates a
market is to let the market work. We cannot a priori determine
what the price will be for selling hog bellies. You have to let
a market work to determine what that is. But you can put in an
intermediate price and see how the demand and supply forces
adjust to that intermediate price, and maybe with a band around
it to give some room to see whether it goes to the higher end
or the lower end of that band.
We want China to come up with the right answer to that.
They are in a better position than we are to determine just
what is the appropriate intermediate mechanism. But we want
them clearly, Senator, on a path that takes them to the end
result of a float, of a freely fluctuating exchange rate. That
is the objective here.
Senator Allard. I am going to talk a little bit about the
distribution issue and those distribution services in China.
Can you explain why the distribution rights are so important to
expanding U.S. business in China and how the Treasury is seeing
that these rights are expanded?
Secretary Snow. We are in continuous discussions on
financial market openings with the Chinese authorities. The
USTR handles the general market openings and trade issues with
Commerce. But the financial side of those discussions is
really--Treasury has the primary role, and we are continuing to
press the Chinese for wider opportunities for our firms, for
foreign firms to participate in their financial markets. And
here, Senator, we have seen some good progress. They have
opened up an auto finance industry, anticipating that as they
move into higher income status and more people out of poverty
and more middle-class citizens, there are going to be more
people buying cars, they need a finance industry. We have seen
them open up opportunities for non-Chinese insurance companies.
We have seen them open up opportunities for stock brokerage
operations. So there has been a lot.
Now, they are doing it because it is part of WTO accession,
but they also know that it is what is important for them to
modernize their financial structure, to bring in the capital
and expertise from abroad. After all, this is an economy that
has had relatively little experience with anything but command
and control. And there is a good appreciation on the part of
the technical people in the government, the Zhu Rongji coterie
of people who understand the importance of letting markets
work, of letting interest rates play a role, and having
financial expertise and bank examiners and bank auditors and
all of the infrastructure of a strong banking and financial
system in place.
So we are making progress. Is it as fast as we would like?
No. But is it real and is it measurable? I would say yes, it
is.
Senator Allard. It looks like my time has expired, Mr.
Chairman. Thank you.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Secretary, your own reports states that concerns of
competitiveness with China also constrain neighboring economies
in their adoption of more flexible exchange policies. I take it
from that it is your view that China's currency manipulation is
putting pressure on some of our other Asian trading partners to
suppress the value of their own currencies, which would
contribute to further deteriorating our global trade balance.
Is that correct?
Secretary Snow. Yes.
Senator Sarbanes. Is a general appreciation of Asian
currencies plausible without a substantial appreciation of the
Chinese currency?
Secretary Snow. No. I think large parts of Asia are linked
competitively to China, and that means to the yuan.
Senator Sarbanes. If China moves in a substantial way, will
the Treasury raise the issue of currency manipulation with
other Asian countries, particularly Japan, Taiwan, and South
Korea?
Secretary Snow. Senator, we are in discussions with
countries all through that region about what we think is the
appropriate policies for FEx, for currency, and yes,
absolutely, if we see countries that are not pursuing the
appropriate policies, we will engage with them, absolutely.
Senator Sarbanes. I am interested to get some sense of the
extent to which the current account deficits matter. Your
predecessor was rather dismissive of the current account
deficits. To finance our current account deficit, the United
States borrowed $666 billion last year from abroad, more than
5.5 percent of our GDP. You only have to go back to the early
1980's when the United States enjoyed a sizable international
credit position with the rest of the world worth 12 percent of
our GDP. We were a very strong creditor nation. Now we are the
world's largest debtor nation.
In his annual letter to shareholders, Warren Buffett
recently wrote: ``Should we continue to run current account
deficits comparable to those now prevailing, the net ownership
of the United States by other countries and their citizens a
decade from now will amount to roughly $11 trillion. And if
foreign investors were to earn only 5 percent on that net
holding, we would need to send a net of $0.55 trillion of
goods''--over half a trillion--``and services abroad every year
merely to service the U.S. investments then held by foreigners.
This annual royalty paid the world, which would not disappear
unless the United States massively underconsumed and began to
run consistent and large trade surpluses, would undoubtedly
produce significant political unrest in the United States.''
What is your view of this potential situation?
Secretary Snow. Senator, as I have said, we think that
there are important imbalances in the global economy that need
to be addressed. We have tried to put in place a constructive
framework for doing so. It is a framework that we have put in
place with the G-7, for instance, with the IMF. Rodrigo Rato,
the Managing Director of the IMF, and I talk about this
regularly. We talked about it yesterday morning and yesterday
night, actually. That framework, though, it is awfully
important to understand this. This framework involves others
besides the United States, in addition to the United States. It
involves the United States. We absolutely have to bring our
deficits down, reduce our net dissavings through governmental
policies. We absolutely have to raise household savings rates.
But other parts of the world need to do things, too. They
need to pursue policies that will create larger domestic
economies that will absorb more of their savings. They need to
develop policies that will make their economies more productive
and innovative so that our goods will find more of a market.
And China and Asia needs to move to flexibility. That
combination of things I think will restrain the growth and
eventually turn the corner on the current account deficit.
But it is something we follow and monitor very closely, and
we have tried to put in place a constructive--we and the other
finance ministers and central bank governors from major parts
of the world have tried to put in place a framework to deal
with it.
Senator Sarbanes. There is some concern that the shift in
the Treasury's position is in part a move simply to forestall a
gathering momentum in the Congress to pass limitations that
would affect the United States-China trade, and that the
Administration, if they could get some relatively minor
adjustment in the peg rate--I mean, I see these preposterous
figures being talked about in some articles of 5 percent, and I
see the Chief Economist of the China International Capital
Corporation says it remains too risky to relax the peg too
much, so China may well start from a 5-percent revaluation. The
Chief Economist of Galaxy Securities in China says, ``The
making of decisions in China is mostly consensus-based, so that
might lead to a compromise of a 3- to 5-percent rise in the
renminbi's value.''
It seems to me that thinking in those terms it completely
misses the mark. I do not see how you begin to address this
problem if that is the framework in which it is being thought
about.
I noticed the European Central Bank President has now
explicitly stated publicly, calling in unusually frank
language--this is an article in the Journal--for China to allow
its currency to appreciate against the U.S. dollar and,
therefore, the euro in a bid to damp the surge in Chinese
exports. I think many of us see this as approaching a crisis
status, and the magnitude of what is being talked about, at
least in some circles, seems totally inadequate to the problem.
What is the Treasury's view about that?
Secretary Snow. Senator, our view is, as stated in the
report, that this adjustment has to be material and has to be
significant, has to be something that will significantly close
the gap between the current value and a more appropriate value.
As I said earlier, we have a very able representative of
the Treasury Department like you and Senator Schumer, a fellow
graduate of the Harvard Law School--where I guess you learn a
lot about negotiations--in China right now dealing with the
Chinese authorities. He is diplomatic, but he is plain-spoken,
and he is real smart and he knows how to get ideas across. I am
confident that there will be no misunderstanding that when we
say material and significant and significant step on the path
to flexibility, that he will convey what needs to be conveyed.
Senator Sarbanes. Mr. Chairman, could I close with just one
final observations?
Chairman Shelby. Sure, go ahead.
Senator Sarbanes. Under the first Bush Administration, the
Treasury Department twice found that China was engaged in
currency manipulation. In both instances, China was running a
trade surplus of about 3 to 3.5 percent of GDP against the
United States as compared to the 9.8 percent it ran last year,
just under 10 percent. Back then, in the early 1990's, China
had a global current account surplus of around $13 billion. Of
course, we saw earlier what the figures are now. They are
astronomical. And that does raise the question--and I am not
seeking an answer. I state it as a rhetorical question. If
China was manipulating its currency under those circumstances,
how can we possibly find that it is not engaged in manipulation
now?
I would pursue with you what these technical items are that
you say have forestalled you from finding--our current
technical requirements from finding currency manipulation now,
but I think it is clear this issue is not going to go away. I
think the Congress will continue to press it, and press it very
hard. And in some respects, the most direct thing that Congress
can do is this legislation that some of my colleagues have put
in which would affect the duties on the flow of goods into this
country. And obviously there is considerable support in the
country for such a measure.
Let me see if I can find it here real quickly. The
President of the National Association of Manufacturers said,
``If this is not currency manipulation, then what else would
ever qualify?''
I will leave that question with you. Thank you, Mr.
Chairman.
Chairman Shelby. Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
Secretary Snow, welcome.
Secretary Snow. Thank you.
Senator Hagel. I know we are talking this morning about
currency exchange rate policy and that is the object of the
hearing. But I do not think, as has been evident in our
exchange this morning, that we can talk about currency and
exchange rate policy in a vacuum. The fact is, as you know so
well, we are part of a global marketplace. We are part of a
world trading regime. Currency is a big part of that, an
important part, but there are many other dynamics that flow
into that.
I have been over the last few months concerned that we have
focused so totally on currency that we are missing some of the
other big pieces here. You had noted not only in your statement
by in conversations that we have had privately and other
opportunities you have had to talk about this issue, and
realizing, as you have said this morning, that you are not the
Trade Ambassador nor the Secretary of Commerce, but you are
integral to the larger picture of trade.
I would like to take the time I have, Mr. Secretary, to ask
you to delve into, for example, internal reforms that you all
have been working on with the Chinese, banking reforms,
transparency, Senator Allard talked about distribution rights,
intellectual property issues, opening up more opportunities for
our financial services to compete and participate in China. But
it seems to me we may be missing a point here. We are so
focused--not everyone--on the currency and the exchange rate
that we are letting all the other bigger issues in one sense
and far more reaching with far more significant long-term
policies and consequences in currencies, that we are not maybe
paying enough attention to those, like getting our medium and
small businesses into China and doing everything we can to
break down those walls, to your point the growth of America's
economy. Every conversation we have had this morning is about
that, sustaining and strengthening that growth.
Yes, at this point in the marketplace and in our history,
we are running deficits. Those are not good, and you noted
that. And, by the way, I think you and the Administration
deserve some credit for a lot of the things that you are doing
under the radar that do not get the attention and the
headlines. But you are setting a baseline here that is very
important for, I think, the one issue here that we are not
paying attention to, and that is America's future competitive
position in the world. That is complicated because it enlists
many dynamics, and many of those are uncontrollable.
But let us go back to something fundamental. We are in a
world marketplace. Trade is not a guarantee. Trade is an
opportunity. And we have everything at stake here. And so the
blips in the currency and the exchange rates quite frankly do
not bother me. What does bother me is that I want to be
assured--and I think we all do, and America needs to be--that
we are doing what we need to do, is open up those markets for
American competitive positions and our products.
With that, would you care to respond to any of that, Mr.
Secretary? Thank you.
Secretary Snow. I would, Senator Hagel. Thank you very
much.
I could not agree with you more. This is about a lot more
than the currency. Currency is an important component, but it
is far from the whole story. I think China will move to a
flexible currency because they are going to find it is in their
own interest to do so. But if that is all that happens and we
do not get market openings to let our firms go in there, and
then if when our firms get in there they get knocked off and
their products counterfeited so they cannot succeed, we have
not accomplished very much.
So while the currency is important and we are going to
continue to press it, the activities of your former colleague,
Congressman Portman, now Ambassador Portman, are right at the
center of this, and Commerce Secretary Carlos Gutierrez, and
you may know that the three of us, with the NEC, meet regularly
to make sure we have a strong, well-formulated, well-conceived,
and clearly understood among us policy, the end product of
which is you have to play by the rules. You have to play by the
rules. And the rules are you are in our markets, we need to be
in your markets. We do not rip off your public sector, we
respect intellectual property rights, you have to respect
intellectual property rights.
I think you are going to see continued, forceful
communication of those basic ideas with the Chinese and with
the whole trading world, because it is not just China, but they
are the largest single example of a place where the policies
need to have major reforms.
So, I agree with you. We are going to continue to press on
the currency issue, but others are going to press on the other
issues, and I will press on these financial market openings
because many of Senator Schumer's constituents, I know, are
very interested in being in China. They come and talk to me
about it and ask for our help in making sure that the weight of
the U.S. Treasury is there to press for market openings, and we
are delighted to do that.
Senator Hagel. Mr. Secretary, I would just add, with the
indulgence of the Chairman, I think the Olin Wethington
appointment was a very good one, and I congratulate you on
putting someone like him who understands the real world in that
position so that it gives us not just a monitoring position by
an active participant in this process to do the things that you
and your colleagues are attempting to do.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Secretary, welcome. How are you doing?
Secretary Snow. Fine, sir. Nice to see you.
Senator Carper. Very nice to see you.
I apologize. As you can see, now I am here. We have a lot
of different hearings we are trying to get to, and this is the
third I have stopped by. I have one to go this morning.
I was just going to ask you to just take a minute or two
and just show us in a couple of takeaways that you want to be
absolutely sure that we walk out of here being aware of. And
underline and put an exclamation point at the end of them for
me.
Secretary Snow. Senator, the big takeaway from our report
is China is ready to move to a much more flexible exchange
rate. They have prepared the way, and now is the time for China
to act. If China stays on the course they are on today, without
major alteration, then we will have little option but to find
them as a manipulator under the technical requirements of the
statute. That, I think, is the large message of our report.
Senator Carper. Even if that were to happen, how
significantly would that affect the imbalance that we now have
in trade?
Secretary Snow. The trade imbalance with the global
economy, I think, would be affected significantly over time if
China moves to a flexible exchange rate that reflects the
underlying conditions, allows the market to set it overall,
because I think their movement would affect currency valuations
with their competitors, who very much watch what China does,
and that would lead to adjustments which I think would be
favorable for our balance of payments and for our current
account.
With China itself, I think there would be a healthy
adjustment process. But I think for the foreseeable future we
are going to have a trade imbalance with China. I do not think
that moving to a flexible exchange rate is going to eliminate
our trade imbalance with China, but it would help the overall
adjustment process.
Senator Carper. If our trade imbalance with China were
somehow magically eliminated altogether, do you have any idea
what our trade imbalance with the rest of the world would be
now?
Secretary Snow. Well, it depends how it gets eliminated. If
it gets eliminated because China revalues, moves to a flexible
exchange rate and their currency goes up, and then the exchange
rates of their competitors go up, then of course the United
States is being put in a better position. That would narrow our
trade deficit not only with China, but also with large parts of
the rest of the world. So it would be a positive development.
Senator Carper. Do you know, when we try to quantify our
trade imbalance from last calendar year, do you recall what it
was with the rest of the world?
Secretary Snow. Yes, we were $500 billion or so.
Senator Carper. And roughly how much of that was
attributable to China?
Secretary Snow. Last year, it was around $100 billion.
Senator Carper. So if we eliminated it altogether, we would
still have a trade imbalance of over $400 billion?
Secretary Snow. Well, that is right, Senator, that--China
is a part of the trade imbalance. They are roughly $160 billion
on $700 billion--or $680 billion. So they are a significant
part, but they are not the whole story.
Senator Carper. When you look at the imbalance with China,
has it been growing in recent years? It has, hasn't it?
Secretary Snow. Yes, it has.
Senator Carper. When you look at the imbalance with other
parts of the world with whom we trade, what is going on in
there? Are those imbalances growing as well? Are some stable,
others growing, some dropping?
Secretary Snow. Well, the picture with Asia is general
imbalance; it has been rising. The picture with Europe is a
slower rate of rise of an imbalance.
Senator Carper. How about Canada, Mexico, the people to the
south of us?
Secretary Snow. We have a better trade picture with them
than we do with Asia, that is for sure.
Senator Carper. You have probably already talked about this
and you may have said this in your testimony. I hear from a
growing number of people, not just in Delaware but around the
country, who are past unease to a growing sense of concern,
even alarm with the magnitude of our trade deficit and the
magnitude of our budget deficit. And I am hearing people say to
me these are just not sustainable; this level of trade
imbalance and budget deficit are not sustainable.
As you look forward down the road and you project ahead,
what do we see for this year or next year, maybe the year
beyond?
Secretary Snow. I think we see a pretty good picture on the
fiscal deficit. The numbers that just came in for the April tax
receipts showed a very sizable pickup in Government receipts,
well over 20 percent over the prior year quarter, causing us at
Treasury to conclude that we could reduce our borrowings by
some $40 billion or $45 billion, causing the private sector
forecasters to bring the deficit well down below the initial
forecast of $427 billion to about--well, they vary, but in the
$350-360 billion range, which would put us at around 3 percent
of GDP and, I guess, make us eligible to be a member of the EU,
since they have a 3 percent rule there.
With respect to the current account deficit, the numbers we
had last month on trade imbalances were encouraging. Imports
were down and exports were up. One month does not make a trend,
but it is at least positive to have those numbers coming in
that way. The revised growth numbers for the first quarter,
which went up from 3.1 to 3.5, reflected stronger exports and
also reflected higher productivity and more people working.
So, I think the receipts side of the U.S. Government is
going to continue to show good results, which means we will be
on path to bring the deficit down, as suggested in the budget
materials we sent up earlier this year, to a level by 2009 of
well below 2 percent of GDP, something on the order of 1.5,
1.6--which of course was quite low by historical standards. We
are on the right path there.
Senator Carper. Thank you very much again for being here. I
will just conclude to my colleagues that I believe the numbers
that Secretary Snow has shared with us on the declining budget
deficit assume, really, no further outlays with respect to
Iraq. And I think they presume that we are not going to do all
that much to fix the problems we have with the Alternative
Minimum Tax and some of the other tax issues that are staring
at us down the road.
But thank you so much. It is great to see you.
Chairman Shelby. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
A few quick comments on the discussion that has gone
before. Many of the goods we currently import from China we
used to import from other countries. And China, as it has
become more productive, has not been stealing jobs from the
United States; they have been stealing jobs from Mexico and
Singapore and Malaysia and other places. So we should
understand that. This is not just the United States vis-a-vis
China, it is China's growing power in the world taking over
other jobs--or other goods, I should say, not jobs--other goods
that used to come from other countries that are now losing out
to China. We are not losing out to China. I think we should
make that clear as people talk about, gee, China is now sending
us so much more than they used to. It is not a sum zero game
with the United States. There are other countries that are
affected more than we are.
Let us get back to the whole question of the currency
adjustment that you have been talking about this morning, Mr.
Secretary. It has always been my impression that if China is
going to be a full player in a mature world economy, they are
going to have to play by the same rules that the other
countries do. So it is in China's long-term interest to let
their currency react to the rest of the world economic
pressures the same way other countries let their currencies.
The problem is that they feel it is in their short-term
interest not to do that. And it seems to me, therefore, that
the problem that the Chinese decisionmakers are faced with is
when do we shift from a short-term strategy to a long-term
strategy. And the longer they wait, the greater the disruption
that occurs both in their situation and in the rest of the
world's.
To use a term that is used in other contexts, we need to
find a soft landing for them--or they need to find a soft
landing for themselves, to be more accurate about it, because
we cannot control what they do. However much we tell our
constituents during campaign time that we Senators control all
events all over the world and if you just vote for me all of
the world will be marvelous, that campaign fiction does not
hold up when we come into the world. It is in their interest to
find a soft landing when they can make the transition from the
short-term advantage that they think they get from manipulating
the currency to the long-term advantage that they get when they
join the world like the rest of the countries in the world. And
I gather from what you are saying today, they are beginning to
move toward that soft landing and recognizing that it is in
their self-interest to do the kind of thing we have been urging
them to do.
Can you give us a sense, without violating any of the
sensitive information that might be coming out of the
negotiations that are going on in China, as to whether or not
they recognize the accuracy of what I have just said and if
they have any sense of how quickly they want to get to a regime
that is more logical for their long-term goal of being a full
trading partner?
Secretary Snow. Senator Bennett, I think you have well-
defined the dialogue that is going on in China now. The
technical people, the people at the academies, and the people
at the financial institutions, the Ministry of Finance and the
Central Bank, in my view from conversations I have had, clearly
understand that it is in China's own interest to move. But they
do not make that final decision. The final decision is the
political decision through the State Council.
Senator Bennett. That is what is wrong with China: The
final decision is made still in a communist atmosphere rather
than a free market atmosphere.
Secretary Snow. And I think that debate is going on right
now. In my meetings with the Chinese political leadership, I
have emphasized that--what you said: It is in your interest to
move; failure to move will build up these imbalances and
distortions in your own economy. Because after all, what having
a peg means is that they have surrendered control over their
own monetary policy and they no longer have a monetary
authority that can lean against the winds of inflation or
deflation, so these imbalances cannot be dealt with except
through command and control, not through market processes,
which always introduces the distortions you are talking about.
Olin Wethington is going to continue every day to be making
that case, that it is in your interest to move and the longer
you wait, the larger the distortions. And I am convinced that
the momentum is all on the side of a decision that will put
China much more in the mainstream of a flexible currency
regime.
Senator Bennett. If I might just quickly, Mr. Chairman, a
final observation. As I look around the world, I see economy
after economy, including the European Union, that is being
structured for export. These economies are not growing as
rapidly as the United States'. As you have noted Mr. Secretary,
we are growing at 3.5 percent, maybe even higher, through this
year. There is not an economy of substance anywhere in the
world that is anywhere close. Which means we are carrying the
rest of the world. And they structure their economies for
export, and we are the only place where the economy is
structured for consumption.
And somehow, somewhere down the line, as you have said here
repeatedly and I want to underscore, the other economies in the
world had better start consuming because the United States, no
matter who is President or who is Secretary of the Treasury,
cannot, long-term, carry the rest of the world with us. We have
to increase our savings and the other countries in the world
have to increase their consumption if we and they are going to
prosper. If they depend upon us ultimately to consume their
goods in perpetuity, we are not going to be able to do that.
So whatever we can do to get them to understand that--as I
say, the Europeans are going down this same road. This is not a
Chinese conspiracy against the United States or a Japanese
conspiracy against the United States. They have to start
consuming themselves and then create a rate of growth, maybe
not approaching the United States' rate of growth--China, of
course, is higher than we are, but the base is so much lower
that it is distortive to look at the two growth rates and make
that comparison. The other countries in the world have to
recognize that in a period of globalization or an economy
without borders, they cannot expect and it is not in their
self-interest long-term to try to have the United States being
the only consuming economy in the world. And our rate of growth
that makes it possible for us to consume must be tempered by a
rate of growth elsewhere. This is not a partisan issue or a
Republican-Democrat issue; this is something that all of the
world economies have to understand and work toward.
Thank you, Mr. Chairman, for your indulgence.
Chairman Shelby. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman.
I still am a little confused about how we stand. As you
know, I have appreciated the movement in the new report. But
here is what I would like to know. It is both a prospective and
retrospective question.
First, what has China done differently over the last 6
months--you have said there is progress--that has moved it
closer, in your view, to the statutory definition of
manipulation? What is this progress--or not progress, what is--
I mean, in other words you say there is progress, but the
report seems to be more harsh on the Chinese than the previous
reports.
Secretary Snow. Senator, there is one----
Senator Schumer. And the second, which is prospective. Let
us say they do not change anything over the next 6 months. How
can, then, they be found to be manipulating if they are not
manipulating now? You know, my view is simple: They are
manipulating now and you just did not want to say it for some
diplomatic/political reason--that may not have bad motivation;
I am not denying that. But I am a little confused. What was
different 6 months ago that--what they do worse, and what do
they have to do to get better? What if they do not change?
Because I do not think they have changed at all, except in
verbiage, which matters nothing to trade.
Secretary Snow. Senator, what has changed, of course, is
that surpluses have become larger.
Senator Schumer. That is an effect, not a cause, of what
they are doing.
Secretary Snow. And the reason that we are now prepared to
act as we suggested in the report is that, whereas in prior
reports we did not see them fully ready to move to substantial
flexibility, we now see them ready to do it. Their financial
system can accommodate flexibility.
Senator Schumer. So the lack of progress, given their
ability to progress, is what makes it worse.
Secretary Snow. Exactly.
Senator Schumer. And so you could say that 6 months from
now, if they did nothing, you might be ready to call them
manipulators. I did not say you would, but could.
Secretary Snow. Could. That is right.
Senator Schumer. Well, that is important and I appreciate--
--
Secretary Snow. You have hit on precisely the distinction.
Senator Schumer. So it is somewhat normative. It is not an
absolute standard.
Secretary Snow. No, this is a standard that is somewhat----
Senator Schumer. It is based on what the Chinese are able
to do.
Secretary Snow. Right.
Senator Schumer. Okay. The next question is, let us say 6
months from now they are officially designated a currency
manipulator. And let us hope that does not happen. Let us say
they take action on their own. What specific actions would this
Administration take to get China to change its practices? You
can ask me that question, I will tell you what I would do. But
I am now asking you that question.
Secretary Snow. I think you and I would have different
answers to that question.
Senator Schumer. I think so.
Secretary Snow. I do not think it is helpful to speculate
on what they are going to do.
Senator Schumer. What you are going to do if they do not
change.
Secretary Snow. What we are going to do. Except I will
speculate on what they will do. I think we are going to see
action by China--and I may have to eat those words in 6 months
if you invite me back.
Senator Schumer. Oh, well, we are going to have you back.
We would be delighted to do that.
[Laughter.]
Secretary Snow. But I fully anticipate that before I
return, before we conclude the next report, that we will have
seen the action by the Chinese that we are calling for.
Senator Schumer. A second question relates to interest
rates and the pegging of the yuan. Some have expressed concern
that if China revalues the yuan, interest rates here in the
United States. may rise. This is the same--I mean, people make
such arguments. First they say, well, you should only make them
increase it 5 percent, and then that will not change the trade
deficit very much. I mean, you know, it is beggar thy neighbor
arguments. Because we do not--5 percent will not be good enough
for me and, I think, most of my co-sponsors on the legislation.
Again, it does not have to be moving it immediately, but they
have to begin to move soon and have a path for movement with a
set date.
So they now are saying, oh, interest rates will go up. Now,
excluding Social Security, the U.S. budget deficit approaches
$600 billion this year, once the new war costs are added; our
current account deficit is already over $600 billion, as you
have noted. A large and rising trade deficit combined with
large budget deficits reduces global confidence in U.S. assets,
which could cause asset prices to fall and rates to rise. In
other words, doing nothing might also raise interest rates
because people are getting more and more upset--who knows when
you reach the tipping point--about inaction. So that is why I
think your new currency report says the risks of delay outweigh
the costs of reform.
So, I would like you to explain this further, particularly
as it relates to domestic interest rates.
Secretary Snow. Senator, I do not think we need fear much
at all on the interest rate issue. After all, treasuries trade
daily at over half a trillion dollars.
Senator Schumer. Right. Exactly.
Secretary Snow. What we are talking about here is small
relative to the volume of trading.
Senator Schumer. No, people who just do not like our
proposal do these arguments. But I agree with you. They can
say, oh, it will not change the trade deficit much, but it will
change interest rates much. That is contradictory. The
percentage of Chinese action as a whole of our trade deficit is
a lot greater than the percentage of Chinese action as a whole
of our interest rates measured by treasury trades.
Okay, I have an unrelated question, which I would like to
ask you since I am the last questioner even though I wasn't the
last to be here.
[Laugher.]
Chairman Shelby. I think you left.
Senator Schumer. No, whoa, whoa, whoa, whoa. Okay, in any
case, I am happy to spend more time with you all.
This is about terrorism insurance, which is on our minds,
and there is a deadline coming up so I thought I would, while
you are here, take advantage.
We are just a little over a month away from the Treasury's
deadline to submit the terrorism risk insurance report to this
Committee. As you know, many of my colleagues and I would like
to see it submitted as soon as possible. We want to get a bill
extending TRIA right away. I can tell you not just in New York,
which is the epicenter for this, but in other areas, you are
having projects now slow down, something none of us want. The
ratings agencies have told the reinsurers that they will not
give ratings unless we have a bill for future years, so you
cannot plan a project that might go into the ground or need its
money come January 1. And as you know, these large real estate
projects cannot be turned off and turned on.
So we really need to renew our bill. And certainly, whether
people agree or disagree with our bill, to make a decision soon
makes sense so business people can plot their actions. How
close are we to completing the report? Is it possible to get it
before June 30, because our schedule, if we got it a little
earlier, maybe we could pass a law by July 31, when we recess
for a month.
Secretary Snow. Senator, thanks for raising that important
issue. I am reviewing now the final version of the report. It
looks good. A lot of work has gone into it. It is my
contemplation and certainly hope that we will have it well in
advance of the June 30----
Senator Schumer. That is great news. Thank you.
I am going to conclude on that happy note, Mr. Chairman.
Thank you, Mr. Secretary.
Chairman Shelby. Secretary Snow, to use a football
metaphor, I think you were driving down on, you probably had a
first down on China's 20-yard line. And instead of keeping on
going and perhaps reaching the obvious conclusion in your
report, you elected to punt. I hope you will not continue to do
this.
We are inviting you now and we will continue to invite you
back in October, because we think this is a very important
issue. And it is very complicated, we all know that. But just
about everybody in the world recognizes that China is, has
been, and will probably continue to manipulate its currency
because it gives them certain advantages.
The question is, when are we going to recognize that. And I
hope you will. I hope you will if you have to, because if you
come up here in 6 months and China has not done anything really
material to make their currency flexible, then I think the
Administration will lose a lot of credibility in that area.
Secretary Snow. Mr. Chairman, I thank you for that. And
with Senator Schumer leaving and you here, and your analogy to
the football field, let me say----
Chairman Shelby. Senator Schumer might come back. He is a
busy man.
Secretary Snow. No, I want to say one last thing in
response to that football analogy, and that is we have a player
we would like to put on the field, a quarterback for this
initiative, Mr. Tim Adams right here, who has had his hearings
to be the Under Secretary for International Affairs. If we had
him on the field, I think our chance of throwing touchdowns
would be a lot better.
Chairman Shelby. We have you on the field, though. You are
the Secretary.
Senator Schumer. Mr. Chairman, he is the general manager
and President Bush is the owner.
Chairman Shelby. Absolutely.
Secretary Snow. Here is our quarterback.
Chairman Shelby. We understand.
Secretary Snow. Thank you, Senator.
Chairman Shelby. Thank you.
The hearing is adjourned.
[Whereupon, at 12:12 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
I appreciate the opportunity to continue to discuss with the
Secretary the issue of China's undervalued currency and its general
unwillingness to play fair in the global economy--or its pattern of
playing by the rules only when it suits their purposes. The
Administration's strategy of ``quiet diplomacy'' has yielded few
tangible results, and it is time for our Government to take more
specific action.
Secretary Snow, as you know, I have long been concerned with
China's long list of misdeeds--currency manipulation, violation of
intellectual property laws, limitation of access to their markets, and
subsidizing Chinese companies--misdeeds that also happen to be serious
violations of WTO rules.
We have lost a lot of jobs here in the United States because of
these actions--but the problem goes beyond job losses. It remains a
mystery to me how those who claim to support free trade can stand so
idly by while one of the fastest-growing economies in the world so
willfully flouts the rules.
Simply put, if you believe in free and fair trade, you should want
the Chinese to play by the rules, and you should want their currency to
float. The ``invisible hand'' at work, so to speak. I was glad to see
in your testimony that the Administration now supports a gradual shift
toward a full float in China. The question is, how do we push them to
get there?
I have been working with my colleague from South Carolina, Lindsey
Graham, to try and level the playing field with China on the currency
issue. We introduced an amendment on China currency during
consideration of the State Department Authorization Bill a few weeks
back, and to our pleasant surprise, two-thirds of the Senate voted with
us--including half of the Senators of your party, Mr. Secretary. This
sends a clear signal to the Chinese to shape up. We have been promised
an up-or-down vote on our bill before August recess.
It would be preferable, rather than imposing tariffs, for the
Chinese to act on their own. That is what we hope will happen. But our
bill sends a clear signal to the Chinese that if there is not some
movement on their part, the U.S. Congress will act.
Your report was the first time that the Bush Administration has
called Chinese currency policies ``highly distortionary,'' but it still
falls short of finding them guilty of actual ``currency manipulation.''
It is unclear to me and Senator Graham what else the Chinese would have
to do--or not do--to have the Administration finally find them guilty
of manipulation. You have stepped up to the plate, now it is time to
swing the bat.
To help you along, Senator Graham and I have also reintroduced our
bill that would define currency manipulation for you, thereby making it
easier for Treasury to take decisive action.
Mr. Secretary, I look forward to the opportunity to ask you some
direct questions about China and the currency report. Thank you, Mr.
Chairman.
----------
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
Chairman Shelby, thank you for calling this hearing. I want to
welcome Secretary Snow and say that I cannot think of a more pressing
issue facing our manufacturers and farmers. It is now on par with
healthcare costs as an item that is crippling economic growth in this
country. So, I appreciate that you have made yourself available to us,
Mr. Secretary.
I will tell you up front that I am deeply disappointed with the
Treasury report released last Tuesday. I believe that the Treasury
Department has failed to do what is right and obvious as the report
relates to China and Japan. The report states that no country met the
technical requirements of the law governing manipulation. Most
economists agree that China's currency is undervalued against the
dollar so it is difficult to see why the Treasury Department is
unwilling to state the facts. In fact, given the clarity of the problem
I am led to believe that something other than facts are driving this
reluctance to find violations.
Is it that we fear retaliation by the Chinese and Japanese on our
goods and services? Is it that our Government is reluctant because of
our dependency on those two nations to shoulder our budget deficit?
Many of us have warned the Administration that continued large
budget deficits would eventually limit our ability to address trade
problems--and here we are . . . the day has arrived.
I am certain that much of the discussion today will focus on China,
but Japanese manipulation is a problem that we cannot lose sight of. In
Michigan where auto manufacturing makes up such a large portion of our
economy, Japanese manipulation is a major concern and I will be doing
everything I can to make sure that it is addressed.
The decision by the Treasury Department to again go easy on China
and Japan will cost the State of Michigan jobs at a time when
unemployment remains staggeringly high. Last month the United States
gained 274,000 jobs. Despite this fact, Michigan added another 7,500 to
our unemployment rolls. Specifically, China's currency policies have
cost the U.S. economy 1.5 million jobs over the past 15 years--and
51,000 of those jobs were lost in Michigan. And, these job losses are
damaging diverse sectors of our economy, from auto manufacturing, apple
juice, and auto parts, to furniture and boat manufacturers.
The response that the report gives to these facts is that the
Treasury Department is ``continuing to engage actively with economies
to encourage, in both bilateral and multilateral discussions, flexible,
market-based exchange rate regimes combined with a clear price
stability goal and transparent system for adjusting policy
instruments.'' For those of you here that find that statement murky,
you are not alone. What it means, of course, is that Treasury is
talking to the Chinese and Japanese. If talk would make this problem go
away, it would have been solved years ago.
The Treasury Report dedicates one sentence out of 17 pages to the
negative effects of currency manipulation on U.S. workers. But,
repeatedly describes why manipulation would be bad for China. First,
let us be clear about it--currency manipulation kills American jobs and
it is illegal under WTO and IMF obligations. Even, foreign exchange
markets are sending clear signals that China, in particular, should
revalue its currency.
I believe that there is a strong case for pursuing action against
China in both the WTO and the IMF. China's exchange rate policy
frustrates the intent of the WTO and can be viewed legitimately as
providing an illegal subsidy to exports and imposing an illegal tariff
on imports. Also, its persistent one-sided intervention in foreign
exchange markets flies-in-the-face of the rules governing membership in
the IMF. Mr. Secretary, we need to crack down on countries like China
and Japan and make sure they are playing by the rules.
I, along with Senators Graham and Bayh, have recently introduced
legislation that would create a Chief Trade Prosecutor within the
Office of the U.S. Trade Representative to police our trading partners
and protect our manufacturers from unfair trade practices like currency
manipulation. In fact, the type of case this office should bring
immediately is a WTO case against countries that manipulate their
currency. It does American workers no good to have trade agreements
that are not enforced.
One outcome that would effectively address my concerns with this
currency problem would be for China to revalue its currency
substantially upward. And, for Japan to immediately stop intervening
(verbally or otherwise) on behalf of the yen. Absent this, a legislated
tariff on imports is a potential course of action.
The bottom line is that we cannot continue to set on the sidelines
while our trading partners continue to artificially control prices,
look the other way when it comes to enforcing intellectual property
rights, and fail to live up to all of their obligations under WTO and
IMF rules.
Mr. Secretary, I hope that you will take this opportunity today to
provide a constructive path for the United States on this issue. Last
week's report fell short in my opinion. And, unless some concrete steps
are immediately taken to stem this problem, I am confident you will see
the Schumer-Graham currency bill pass the Senate in July.
I would like to avoid that outcome in lieu of some other remedy,
but unless you offer a third way, what we are left with here is the
lesser of two evils. We either allow China and Japan to continue to
manipulate their currency and destroy our domestic job base or we take
matters into our own hands and level the playing field through tariffs.
Mr. Chairman, thank you. I am looking forward to our discussion on
this issue.
----------
PREPARED STATEMENT OF JOHN W. SNOW
Secretary, U.S. Department of the Treasury
May 26, 2005
Chairman Shelby, Ranking Member Sarbanes, Members of the Committee,
it is a great pleasure to appear before you to testify on the Treasury
Department's latest report on ``International Economic and Exchange
Rate Policies.''
The May 2005 Report encompasses a period of strong global economic
performance, which reflects both great opportunity and challenge. The
global expansion remains robust, more so than in many decades.
Addressing imbalances in the global economy is a shared
responsibility among the major economic regions of the world. While
imbalances occur as the patterns of trade and investment flows shift
between economic regions, uneven rates of growth in the major economies
and inefficient or distortionary policies restrict adjustments and put
stress on the global financial systems. Economic policymakers must
address these imbalances now; waiting increases the risk that
adjustments will occur abruptly.
We know that the international economy performs best when large
economies embrace free trade, the free flow of capital, and flexible
currencies. Obstacles in any of these areas prevent smooth adjustments.
At best, such obstacles result in less than maximum growth; at worst,
they create distortions and increase risks.
The United States is doing its part to address imbalances by
aggressively tackling our fiscal deficit and our long-term liabilities.
Because of strong growth and appropriate fiscal policy, the U.S. budget
deficit in 2004 was well-below projections, and with recent data, I
expect improvement in our fiscal deficit position this year as well.
Some private forecasters predict that our fiscal deficit will be below
3 percent of GDP this year if we continue to hold the line on spending.
We are also working to put in place innovative policies to increase the
savings rate. But our actions alone will not be sufficient.
I expect strong economic growth in the United States to continue.
This is in the U.S. interest, and the world's. It is an essential
component of our deficit reduction strategy as strong growth results in
rising government receipts, as we have been seeing. But it is important
to recognize that there is also no one-to-one correspondence between
reductions in our fiscal and current account deficits. We do not, and
will not, have a current account target. The best contribution the
United States can make to our own people and the global economy is to
keep our economic house in order and ensure continued strong growth.
Our actions alone will not be sufficient to unwind global
imbalances. Simply put, large imbalances will continue if growth in our
major trading partners continues to lag. European and Japanese GDP
together exceeds that in the United States. Some European countries,
such as Ireland and Spain, continue to perform well. But on the
continent, notable weaknesses persist, and Japanese growth, while
turning upward, remains modest. These economies must continue to adopt
and implement vigorous and necessary structural reforms to establish
robust rates of growth--both for the good of their own citizens and to
contribute to reduction in the imbalances in the global economy.
The Treasury Department's Report to Congress on International
Economic and Exchange Rate Policies outlines the currency practices of
America's major trading partners. The report addresses the third--and
most immediately pressing--element of the effort to address global
imbalances: The imperative of exchange rate flexibility, especially in
emerging Asian economies.
The report finds that no major trading partner of the United States
met the technical requirements of the statute for designation during
the period covered, which is the second half of 2004. However, it would
be a mistake to interpret this conclusion as acquiescence with the
foreign exchange policies of many of America's trading partners. In
fact, Treasury is actively engaged with several economies to promote
the adoption of flexible, market-based exchange policies and to help
facilitate broader adjustment. Most notable among these is China.
While the currency report that you have before you discusses
several countries I would like to focus my remarks here on China.
China's rigid currency regime has become highly distortionary. It poses
risks to the health of the Chinese economy, such as sowing the seeds
for excess liquidity creation, asset price inflation, large speculative
capital flows, and over-investment. It also poses risks to its
neighbors, since their ability to follow more independent and anti-
inflationary monetary policies is constrained by competitiveness
considerations relative to China. Sustained, noninflationary growth in
China is important for maintaining strong global growth and a more
flexible and market-based renminbi exchange rate would help the Chinese
achieve this goal.
A more flexible system will also support economic stability, which
we understand is of paramount concern to Chinese leadership. China's
10-year-long pegged currency regime may have contributed to stability
in the past, although it no longer does so, as China has grown to be a
more significant participant in global trade and financial flows.
Currently, China relies largely on administrative controls to manage
its economy--controls that are cumbersome and increasingly ineffective.
An independent monetary policy will allow China to more easily and
effectively pursue price stability, stabilize growth, and respond to
economic shocks. China has a history of significant swings in credit-
fueled investment and inflationary pressures and these have often ended
in ``hard landings.'' Such swings are disruptive to the Chinese economy
and may prove more disruptive in the future--not only to China but also
to the global economy.
A more flexible system will allow for a more efficient allocation
of resources and higher productivity. The current system is fueling
over-investment and excessive reliance on export-led growth while
under-emphasizing domestic consumption. Moreover, much of the
investment and capital flows into these favored sectors and projects
may not prove profitable under market-determined prices, which could
lead to another investment hard landing, more nonperforming loans, and
a weakened banking sector.
And a more flexible system would also quell speculative capital
inflows that are costly to China's Government and increasingly likely
to prove disruptive. China's ability to sterilize capital inflows is
increasingly limited and harmful to its banking sector.
Finally, recent history has taught us that it is better to move
from a fixed to a flexible currency system during from a position of
strength, and not when economic weakness compels reform.
Chinese officials have publicly acknowledged the need to move to a
more flexible system, have repeatedly vowed to do so, and have
undertaken the necessary and appropriate steps to prepare for such a
move.
In September 2003, I began an intensive engagement with China,
aimed at hastening China's move to a more flexible exchange rate. I
believe that this financial diplomacy has yielded important results.
Since then, China has taken critical steps to establish the necessary
financial environment and infrastructure to support exchange rate
flexibility.
It has introduced a foreign currency trading system permitting
onshore spot trades in 8 foreign currency pairs and allowing banks
to act as market makers.
It has adopted measures to increase the volume of foreign
exchange trading, for example: Eliminating the foreign exchange
surrender requirement for many commercial firms; allowing domestic
Chinese insurance firms and the national Social Security fund to
invest in overseas capital markets; and increasing the amount of
foreign currency business travelers can take out of the country.
It has taken steps to develop foreign exchange market
instruments and increase financial institutions' experience in
dealing with fluctuating currencies. Foreign exchange forward
contracts can now be offered in China; foreign exchange futures are
being developed; and domestic Chinese banks can now trade dollars
against other foreign currencies, not just remnimbi.
It has also acted to strengthen its financial sector and
regulation, so that this sector is more resilient to any
fluctuations in exchange rates.
As a result of our approach, of constant intense engagement, China
is now ready to introduce flexibility and should do so now.
Unfortunately, the debate on China's currency regime is clouded by
a number of misconceptions of U.S. policy. Allow me to address a couple
of these. First, we are not calling for an immediate full float with
fully liberalized capital markets. This would be a mistake at this
time--China's banking sector is not prepared. What we are calling for
is an intermediate step that reflects underlying market conditions and
allows for a smooth transition--when appropriate--to a full float.
Second, we recognize that a more flexible system in China, in and
of itself, will not solve global imbalances--as I have said, this is a
shared responsibility. However, greater flexibility in China and other
Asian economies is a necessary component.
Third, some argue that a more flexible system will prove
deflationary and increase Chinese unemployment. In fact, a flexible
system will provide China with a more sophisticated array of policy
tools--namely an independent monetary policy--that will prove much more
effective in achieving price stability and the ability to adjust to
shocks.
Our engagement with China over the past 2 years, including fruitful
accomplishments associated with Treasury's joint Technical Cooperation
Program, leaves me with little doubt that China is now prepared to
begin reform of its currency regime.
In fact, I believe that the risks associated with delay far
outweigh any concerns with immediate reform. The current system poses a
risk to China's economy, its trading partners, and global economic
growth. Concerns of competitiveness with China also constrain
neighboring economies in their adoption of more flexible exchange
policies.
As the report that was sent to Congress last week states, if
current trends continue without substantial alteration, China's
policies will likely meet the technical requirements of the statute for
designation. China is now ready and should move without delay in a
manner and magnitude that is sufficiently reflective of underlying
market conditions.
As the need for adjustment is global, multilateral organizations
are addressing the need for flexibility. The Group of Seven finance
ministers and central bank governors have adopted a policy, stated in
its communiques, that ``more flexibility in exchange rates is desirable
for major countries or economic areas that lack such flexibility to
promote smooth and widespread adjustments in the international
financial system, based on market mechanisms.'' The Asian Development
Bank and the Asia-Pacific Economic Cooperation (APEC) have also
publicly stressed the importance of flexible currency regimes.
The chief officers of the International Monetary Fund and the Asian
Development Bank have also stressed the need for currency flexibility.
I have called on the International Monetary Fund (IMF), as part of its
strengthening of multilateral and regional surveillance, to report on
the potential contribution of emerging Asia to unwinding global
imbalances, including an analysis of the regional impact of the Chinese
foreign exchange system. As policymakers, we have a responsibility to
fully understand these important forces that are shaping the global
economy. As the central international institution for global monetary
cooperation, with a wealth of technical expertise, the IMF is best
placed to undertake this work, and indeed has the responsibility for
doing so.
It is critical that we address the issues of imbalances
aggressively and in a cooperative spirit with the goal of raising
global growth. Nothing would do more damage to the prospects of
increasing living standards throughout the world than efforts to
inhibit the flow of trade. However, it is incumbent on China to address
concerns before mounting pressures worldwide to restrict trade harm the
openness of the international trading system.