Treasury Secretary Henry Paulson testified yesterday to the House Financial Services Committee at a hearing, “The State of the International Financial System.” The most significant issue: China and its overvalued currency. Key Paulson quote:
Although they have taken some steps towards greater flexibility in the short term, they need to accelerate that movement and move more quickly to a market-determined exchange rate in the medium term. While currency reform is not going to eliminate our trade deficit, a market-determined exchange rate that reflects the underlying fundamentals of the Chinese economy is an important ingredient to sustainable, balanced economic growth in China, which is critical to continued stable growth around the world. The huge inflow of liquidity under the current exchange rate policy undermines the effectiveness of China’s monetary policy and fuels excessive growth in credit, which itself poses significant risks for the Chinese economy’s performance. The risk that China now faces is moving too slowly on exchange rate reform, rather than moving too quickly.
The NAM was not happy with Treasury’s latest currency report to Congress, the subject of much discussion yesterday, because it failed to recognize China as a currency manipulator. From our news release on June 13:
“A year ago, Treasury said that China’s currency regime was highly distorting and that if current trends continue without substantial alteration, China will likely meet the technical requirements of the statute for designation,” said NAM President John Engler.” Since last spring’s report, China’s buildup of currency reserves to suppress the yuan has doubled, from about $20 billion a month to over $40 billion a month.
“It is difficult to understand why Treasury chooses not to say that currency manipulation is taking place, when everyone knows it is,” he said. “This was a missed opportunity to put more pressure on China.”
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