U.S. Treasury Secretary John Snow Thursday gave his strongest warning yet that China needs to revalue its currency to better reflect the strength of its fast growing economy.
Testifying in U.S. Congress, Mr. Snow met with hostility from frustrated lawmakers convinced that China is keeping its currency weak in order to boost sales in the U.S. market.
Democratic Senator Deborah Stabenow from the industrial state of Michigan said China's unfair trade policies are hurting the U.S. economy by causing millions of job losses. Ms. Stabenow says China's manipulation of its exchange rate is in violation of International Monetary Fund (IMF) and World Trade Organization (WTO) rules.
"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," she said.
In its report, the Treasury Department stopped short of saying China is manipulating its exchange rate to gain a trade advantage. But Mr. Snow made clear that China must quickly adjust its fixed peg link to the U.S. dollar to better reflect economic fundamentals.
"We have clearly indicated in this report [to China] that while you are now ready [to adjust your exchange rate], you've 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," said Mr. Snow.
Mr. Snow, who submitted his report on China to Congress, said he is disappointed Beijing has not already moved to revalue the yuan. Both houses of Congress are considering measures that would punish China for incurring steadily rising trade surpluses with the United States. In demanding retaliatory action by the Bush administration, Democratic Senator Charles Schumer from New York accused China of wanting the advantages of free trade, but not the responsibilities.
Mr. Snow did not say by how much he wants China to revalue, but cautioned a modest, cosmetic revaluation would not be adequate. Exchange rates and global economic imbalances will be considered by leading world finance ministers when they meet in early June in London.