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Report by alliance spotlights China currency manipulation

WASHINGTON -- In an effort to keep pressure on the Bush administration to convince the Chinese government to stop manipulating the yuan, the Fair Currency Alliance has released the second in a series of papers crafted to highlight China's alleged currency abuses.

Entitled "Experts Agree: China's Currency is Undervalued," the paper provides undervaluation estimates from an array of international banking organizations and financial institutions ranging from a high of 75 percent to a low of 10 percent. The Fair Currency Alliance has pegged the yuan's undervaluation at up to 40 percent.

"There is consensus among economists worldwide that China's currency is, and has been, substantially and persistently undervalued," said David Hartquist, alliance spokesman. "The undervalued yuan puts U.S. companies at a disadvantage whether competing in the United States, China or elsewhere."

The tabulation contained in the report and listed below summarizes the estimates of the undervaluation of the Chinese yuan using data as recent as the fourth quarter of 2003.

According to the briefing paper, increases in U.S. dollars flowing into China from both its trade surplus with the United States and its foreign-direct-investment inflows face tight controls by the Chinese government, which has sharply restricted authorized uses of U.S. dollars. The primary authorized "use" of U.S. dollars is conversion into yuan, which means there is a constant selling of U.S. dollars and buying of yuan in China.

In order to forestall an unwanted appreciation of the yuan vis-a-vis the U.S. dollar, the Chinese government intervenes in the market and purchases any amount of U.S. dollars by "selling" (i.e., printing) any amount of yuan required to keep the value of the yuan narrowly fixed vs. the U.S. dollar, the briefing paper said. Consequently, the Chinese government's intervention in the market to buy U.S. dollars at a fixed price indicates that U.S. dollars are in excess supply at the prevailing rate of exchange; otherwise, the market would clear on its own and make unnecessary that the government be the demander of last resort. Thus, China's soaring official foreign-exchange reserves clearly confirm the undervaluation of the yuan, the briefing paper said.

Alliance members, a broad coalition that includes several metals groups, contend that because the exchange rate does not reflect market conditions, U.S. exports to China are artificially priced higher while Chinese products are priced lower in the U.S. market.

The group said future papers would focus on the impact the undervalued yuan has on the Chinese economy and the global financial system; China's alleged violations of international trade and financial agreements; and steps that the U.S. government should take to ensure parity and fair play.

Taking Measure of the Yuan

Analyst            Publication             Date         Undervalued

World Bank         PPP Level               2000         75%

Big Mac Index      The Economist           Apr. 2003    56%

Preeg              MAPI                    Sept. 2002   40%

Yang and           Is the Chinese          Nov. 2003    27.99% *
Bajeux-Besnainou   Currency
                   Undervalued?

Williamson         IIE lecture             Oct. 2003    Over 25%

Anderson/UBS       The Complete            Oct. 2003    Nearly 25%
                   RMB Handbook                         in real terms

Goldstein          Testimony to Congress   Oct. 2003    15-25%

O'Neill & Wilson   Goldman                 Sept. 2003   10-15%
                   Sachs Report

Bhalla             Chinese Mercantilism:   July 1998    10-15%
                   Currency Wars and                    as of 1998
                   How the East was lost

* Based on PPP and using 1985 as fixed base year

Nancy E. Kelly

nkelly@amm.com

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