Banging the Drum on China

NEW YORK — The chorus of voices complaining about China's trade practices has grown in recent months to include a diverse range of labor activists,...

with contributions from John Zarocostas

While China's economy is growing — GDP rose 9.1 percent last year, according to Chinese government statistics — it remains on shaky footing. The country's banking system is seen as weak, as is its energy infrastructure. Today, companies that build major apparel and textile factories in China tend to construct their own electrical plants on site to ensure they'll be able to operate a normal schedule.

Given that uncertainty, many experts assert that the drive in the Senate to force China to stop managing its currency to maintain a fixed exchange rate of about 8.28 yuan to the dollar is misguided.

"To hold down the value of their currency, they are funding our current account deficit," said Deloitte's Kalish. "If they let their currency go up in value, they will stop buying U.S. Treasury securities. We will have to sell those bonds to the [U.S.] public, who will demand a higher return, interest rates will go up and we will have a recession."

Dartmouth's Bernard added, "China would like nothing better than to have a financial system that was well developed, an exchange rate that floats freely and open capital markets ... .If they were to do that before they were ready, an economy that includes a quarter of the world's population would be heading south fast."

He offered an example of the shortcomings of China's financial system: Chinese citizens, who are limited in their ability to invest outside the country, lack places to put their money where they can expect to earn a rate of return that exceeds inflation. So for many Chinese, saving for retirement means putting back half their income.

However, most experts say it's unlikely that China will respond to U.S. requests to float its currency anytime soon and almost certainly not before the 2008 Summer Olympics in Beijing.

But even as they dismiss the likelihood of action on currency, trade experts regard it as all but certain that China's apparel and textile exports will face restraints by the end of the year. Domestic manufacturers and importers both expect the U.S. and European Union to impose safeguard quotas on at least some categories of Chinese goods.

Tom Haugen, executive director of Li & Fung Ltd., the $6.06 billion Hong Kong-based sourcing powerhouse, described the current surge in Chinese apparel exports as "just a natural correction."

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