Chinese Premier Wen Jiabao said on May 16, that
China regards the reform of the exchange rate of the renminbi as an issue
of sovereignty and will never yield to any external pressure to change
The US trade deficit with China, has grown from $68.7 billion in 1999 to $162 billion in
Last year Wal-Mart (America and
the world's biggest retail stores group) imported $18 billion worth of goods
from China. Of Wal-Mart's 6,000 suppliers, 80 percent are from
Trade with China : 2004
NOTE: All figures are in millions of U.S. dollars.
US Trade with China : 2005
NOTE: All figures
are in millions of U.S. dollars.
'TOTAL' may not add due to rounding.
- Table reflects
only those months for which there was trade.
- CONTACT: Data Dissemination
Branch, U.S. Census
Bureau, (301) 763-2311
- SOURCE: U.S. Census
Bureau, Foreign Trade Division, Data Dissemination Branch, Washignton, D.C.
Testimony of Treasury Secretary John W. Snow
Senate Committee on Banking, Housing and Urban Affairs
on the Treasury
“Report to Congress on International Economic and
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
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.
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
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% 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
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
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
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
The Treasury Department's Report to Congress on International
Economic and Exchange Rate Policies outlines the currency practices of
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
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
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
While the currency report that you have before you discusses
several countries I would like to focus my remarks here on
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
Sustained, non-inflationary growth in
important for maintaining strong global growth and a more flexible and
market-based renminbi exchange rate would help the Chinese achieve this
A more flexible system will also support economic stability,
which we understand is of paramount concern to Chinese leadership.
ten-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.
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
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 non-performing loans and a weakened banking
And a more flexible system would also quell speculative capital
inflows that are costly to
government and increasingly likely to prove disruptive.
to sterilize capital inflows is increasingly limited and harmful to its banking
Finally, recent history has taught us that it's 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 of 2003, I began an intensive engagement with
China, aimed at
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 eight foreign currency pairs and allowing banks to act as
- 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
- 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
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
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
regime is clouded by a number of misconceptions of
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 –
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
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 two 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
constrain neighboring economies in their adoption of more flexible exchange
As the report that was sent to Congress last week states, if
current trends continue without substantial alteration,
will likely meet the technical requirements of the statute for
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
communiqués, 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 policy-makers, 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