China hits back in war of words

Officials dismiss U.S. criticism of yuan policy, call steps to curb textile exports unfair.

May 18, 2005: 6:39 AM EDT

BEIJING (Reuters) - China dismissed U.S. criticism of its fixed currency peg Wednesday and attacked European and U.S. steps to curb Chinese textile exports as unfair.

The war of words reflects growing political unease on both sides of the Atlantic over jobs that are being lost because of a relentless increase in low-cost imports from China -- many of them made in factories built by U.S. and European companies.

The U.S. Treasury warned Beijing on Tuesday it could be labelled a manipulative trading partner unless it took steps towards scrapping the yuan's decade-old peg against the dollar.

Commerce Minister Bo Xilai said Beijing was studying the Treasury's report but it disagreed with its conclusions.

"I believe they are not reasonable," Bo told Reuters on the sidelines of a business forum.

Washington on Tuesday issued its toughest warning yet on China's rigid foreign exchange policy, which U.S. manufacturers say undervalues the yuan by as much as 40 percent giving Chinese exporters an unfair advantage in world markets.

The U.S. Treasury said in a semi-annual report that current Chinese practices were "distortionary" and posed a risk to global economic growth. A finding that China was indeed manipulating its currency could open the door to retaliatory action, within the bounds of international trade law.

Hours after the U.S. accusation, China kicked off a new foreign exchange dealing system that allows trading in currencies other than the yuan, a milestone in the country's effort to reform its tightly controlled currency regime.

China has long said that it intends to unshackle the yuan, also known as the renminbi, which has been pegged near 8.28 to the dollar since the 1997-98 Asian financial crisis.

But a senior official reaffirmed an assertion Monday by Premier Wen Jiabao that China would not be bulldozed into acting.

"We agree with many of you that a more flexible regime would be better for China's economy. But there is no timeframe for such a change as conditions are not ready yet," Wei Benhua, deputy chief of China's foreign exchange regulator, told a trade conference in Singapore.

Wei said accusations that China was deliberately holding down the yuan were groundless and told the United States to "put its own house in order before blaming others" for its trade deficit.

Vital statistic
Commerce minister Bo also cried foul at moves by the United States and Europe to curb China's textile exports.

Washington last week decided to restrict imports of Chinese trousers, shirts and underwear. The European Commission stepped up the pressure on Tuesday, seeking emergency talks on T-shirts and flax yarn that could lead to curbs on imports into the EU.

Bo said Washington and Brussels had 10 years, until the end of 2004, to phase out quotas on developing countries' textile imports.

"Regrettably, developed countries such as Europe and the United States failed to do so," he said. "They kept the vital part of 70 to 90 percent of quotas until the end of last year, which led to a temporary surge in Chinese textile exports early this year."

The quotas were finally scrapped Jan. 1.

Tens of millions of Chinese people depended on textiles for their livelihood, and $1.26 billion worth of exports had already been affected by the new curbs, Bo told reporters later.

"After four months they are setting limits. We think this is without reason," he said.

Under terms agreed by China when it joined the World Trade Organization in 2001, the EU could cap the rise on imports from China within 15 days of the start of formal consultations if Beijing took no effective action to limit exports.

The explosion of low-cost Chinese imports has become a sensitive issue in many European countries and in the campaign for France's May 29 referendum on the EU constitution.

But Bo said rich countries must stick to the global trade agreements they had signed.

"In international trade, we can't have pragmatism: if the rule is favorable you implement it; if it is not favorable you don't implement it. The current problem of textile trade is a typical case," he said in his speech.