WASHINGTON (MarketWatch) -- Chinese President Hu Jintao makes a long-awaited visit to Washington on Thursday, but few trade experts expect his meeting with President Bush to defuse growing frustration by U.S. lawmakers and manufacturers over China's currency policies.
"I doubt that President Hu can deliver in a concrete way on the currency, so I would look for the words he chooses, the signals that he sends," said Michael J. Green, a senior adviser at the Center for Strategic and International Studies, a Washington think tank, and a former staff member of President Bush's National Security Council.
The core issue is Beijing's longstanding policy of pegging the yuan currency to the U.S. dollar. While that tie has been loosened since late last year, U.S. manufacturers and a growing chorus of lawmakers contend the Chinese currency still remains vastly undervalued against the greenback, undercutting U.S. exporters and driving a record $202 billion trade deficit with China in 2005.
Concerned that a rapid revaluation could undermine economic stability at home, China is expected to do little more than continue nudging the yuan higher against the dollar, experts say.
Green, who spoke at a CSIS panel discussion on Hu's upcoming visit, said any pronouncements on currency policy are likely to be highly nuanced, but would undoubtedly be the result of a "collective decision" by the Chinese leadership "and will have real weight."
"But the administration will really have to squeeze it out of him," he said.
Critics of China's currency policy contend the yuan remains undervalued by as much as 40% against the U.S. dollar. For its part, the Bush administration has publicly pressed China to let the yuan appreciate more quickly. Treasury Secretary John Snow on Tuesday reiterated the administration's contention that China hasn't let the yuan gain enough ground.
But administration officials have also sought to head off pressure on Capitol Hill for retaliatory action against China. The most daunting piece of legislation comes from Sens. Lindsey Graham, R-S.C., and Charles Schumer, D-N.Y., which would impose punitive tariffs of 27.5% on imports of Chinese goods unless the yuan is significantly revalued.
The senators, after a weeklong visit to China last month, agreed to delay a vote on the bill, but warned Beijing that they would seek action by September without satisfactory action on the currency front.
The Treasury Department, meanwhile, has delayed the issuance of its currency report until after Hu's visit, but could formally label China a "currency manipulator" when the document is finally released.

Checkbook diplomacy

China, meanwhile, has sought to ease trade tensions in other ways. Vice Premier Wu Yi led a delegation of Chinese trade officials on a multi-state tour of the United States ahead of last week's annual meeting with top U.S. trade negotiators. Wu brought her checkbook, signing deals for around $16 billion worth of U.S. goods.
China has also pledged to step up its enforcement of intellectual property rights, cracking down on purveyors of pirated DVDs and other software, and ordering that all Chinese-built computers be loaded with legitimate, licensed software. China also agreed to take steps to re-open its market to U.S. beef.
Hu arrived Tuesday in Seattle, where he's slated to dine with Microsoft CEO and co-founder Bill Gates and to visit a Boeing manufacturing plan. In last week's visit, Wu inked a deal for 80 Boeing airplanes, and Chinese PC-makers have agreed to purchase hundreds of millions of dollars worth of licensed versions of Windows.
Meanwhile, U.S.-based exporters are pressing for urgent action on the currency front. The National Association of Manufacturers welcomed last week's trade developments, but warned that concrete action is needed on the currency front and intellectual property.
"President Hu must realize the time has come when the fundamental issues have to be resolved. America's manufacturers are not asking for anything unreasonable," said Frank Vargo, NAM vice president for international affairs, following last week's meeting.

Careful what you wish for

Trade experts warned, however, that any future revaluation of the Chinese currency could backfire on U.S. firms depending on how it's engineered.
For instance, China could seek to rapidly push up the yuan by halting Chinese purchases of U.S. government debt, noted Wing Thye Woo, an economics professor at the University of California at Davis and director of the East Asia Program at Columbia University's Center on Globalization and Sustainable Development. But such a move would likely undercut U.S. asset values, crashing the stock market while also fueling inflation, forcing the Federal Reserve to boost interest rates, he said.
"Really, what we want is the Chinese to be flexible, to appreciate their currency over time in line with developments in their financial sector, so that there is an orderly winding down of the huge trade deficits that we have," Wing said, at a forum sponsored by the Brookings Institution, a Washington think tank.
But trade experts agreed that China's currency policies have contributed to rising trade tensions that could eventually undermine the world trading system.
"The crucial point ... is that the failure of China to permit its currency to move, as most other countries in the world are doing, leads to a major protectionist trade reaction here in the United States," said C. Fred Bergsten, director of the Institute for International Economics.
"The point is -- ad we know this from history -- that if currencies remain way out of line, trade protectionism follows," Bergsten said, at the CSIS panel discussion.


'President Hu must realize the time has come when the fundamental issues have to be resolved.'
— Frank Vargo, NAM



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