CHAPTER 11

China and the Exchange Rate Issue

By the summer of 2003 the issue of China’s exchange rate policy became a clear front burner issue. General concerns about the pace of the American economic recovery and the reduction in U.S. manufacturing jobs continued. It was understandable, therefore, that the American people and many of their representatives in Congress would point to the large U.S. bilateral trade deficit with China and the pegged exchange rate at 8.28 RMB per dollar as the source of the problem.

President Bush and his administration took these issues very seriously from the outset. Since the exchange rate is clearly a Treasury issue, the Treasury had an important role to play in developing and implementing the Administration’s strategy. That strategy was to focus on exchange rate flexibility rather than simply revaluing the exchange rate. From the outset the emphasis was on financial diplomacy, rather than the isolationist legislation that was being proposed in Congress. Moreover, we wanted a multilateral approach, with the other G7 countries playing a role along with the United States. The United States would also provide technical assistance to China so it could more expeditiously take the necessary prior steps to prepare for a flexible exchange rate. Treasury Secretary John Snow traveled to China in September 2003 to make the case that it was in China’s and the world’s interest to move to a flexible exchange rate. President Bush spoke with President Hu about the issue. A process was put in place to invite the Chinese finance minister and central bank governor to meet with the G7. Technical teams met in Washington and Beijing.

The first two items in this section are testimony in which I presented the Administration’s approach to two important committees of congress early on in the process. The third item updates the situation, after a trip I made to China in the spring of 2004. I reported that good progress was being made by the Chinese in preparing to move to a flexible exchange rate, and that progress continued in the year since. In fact, by the spring of 2005, it was the Bush Administration view that enough steps had been taken, and that it was now time to move to a flexible exchange rate.

1. China's Exchange Rate Regime and its Effects on the U.S. Economy, Subcommittee on Domestic and International Monetary Policy, Trade, and Technology House Committee on Financial Services, October 1, 2003

2. Economic Relations between the U.S. and China and China's Role in the Global Economy, House Committee on Ways and Means, Oct 30, 2003

3. Press Statement on visit to China, Beijing, China, May 11, 2004