Counting Down to 2005: China’s Strong Currency Heightens Trade Debate

As the end of quotas nears, industry experts wonder if China will float its currency, and if the U.S. will clamp down on Chinese imports.

NEW YORK — As the end of quotas in 2005 looms closer, industry experts have two major questions on their mind regarding China, which has the potential to be the world’s dominant supplier of apparel.

Looking toward Beijing, they wonder if the Chinese government will float its currency, which many economists contend is currently undervalued by about 40 percent, making Chinese exports even more competitive abroad than they would otherwise be.

Looking at Washington, they wonder if the U.S. government will take advantage of loopholes in a China-U.S. trade deal that could allow the U.S. to clamp down tightly on Chinese imports if they disrupt the U.S. market.

Ira Kalish, the author of a recently released Deloitte Research study on China’s growing role in the world economy, has an answer for both questions: Yes.

“My own belief is that there will be a deal between the U.S. and China, where China agrees to revalue its currency and the U.S. agrees to hold off on doing anything protectionist,” Kalish said in a phone interview.

It’s a theory that met with a range of reactions among industry observers, with some calling it plausible and others dismissing it out of hand.

Currently, the Chinese government keeps the yuan pegged at an exchange rate of about 8.29 to the dollar. It has maintained this exchange rate by buying up foreign currency and keeping large amounts of yuan in circulation. China’s foreign currency reserves currently stand at about $325 billion, up from about $50 billion in 1994, the report said, citing International Monetary Fund data.

China’s fixed exchange rate has become a major political issue in the past few weeks. Treasury Secretary John Snow on Tuesday traveled to Beijing, where he urged Chinese officials to allow the yuan to float freely, according to wire-service reports. His comments came a day after top Chinese officials said they had no intention of floating the yuan.

“From what I understand, China is pretty determined not to float until they are good and ready,” said Conrad Lung, president of Sunnex Inc., a New York importer. “But the stakes are so high for both sides, I’m sure they’re going to find some way to lessen the impact.”
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