June 7, 2006    Volume 13, No. 11

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Treasury Department Uses 'Flawed' Chinese Data To Rule In Favor Of China's Currency Practices

BY KEN JACOBSON ken@manufacturingnews.com

The U.S. Treasury Department is upholding its controversial use of Chinese government trade data as the basis for its twice-yearly determination of whether China is manipulating its currency, in effect dismissing charges by the China Currency Coalition (CCC) that it is relying on "skewed numbers."

The CCC's counsel, David Hartquist, last week called the department's analysis of China's currency policy "terribly flawed," commenting in the wake of the agency's latest "Report to Congress on International Economic and Exchange Rate Policies," released on May 10.

While the report found that "far too little progress has been made in introducing exchange rate flexibility," it said it was "unable" to affirm that China had been manipulating the yuan -- or, in Treasury's exact words, "that China's foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in China's balance of payments or gaining China an unfair competitive advantage in international trade."

Hartquist countered that "year after year, the Chinese government's official trade data report inflated values for China's imports that cannot be squared with the trade data of China's 40 largest trading partners," noting that China's data "coincidentally favor [its] view that the yuan is not undervalued."

He described CCC, which groups several dozen U.S. industrial, service, agricultural and labor organizations, as "absolutely bewildered" by Treasury's exclusive use of the Chinese numbers in its analysis, calling the practice "demonstrably wrong."

A Treasury Department spokeswoman, Deputy Assistant Secretary for Public Affairs Brookly McLaughlin, said there were two reasons for the agency's use of numbers supplied by China: 1) "These are the official data"; and 2) "They are the only source of the non-merchandise trade components" of China's balance of payments. She declined further comment.

The relevance of the second point was disputed by Patrick McGrath, managing director of Georgetown Economic Services, which provides CCC's analysis. He noted that, according to China's own data, China imported $72 billion in services in 2005 while exporting $62 billion, a deficit of $10 billion for the year.

This he contrasted with China's merchandise trade surplus for 2005: $148.9 billion according to the Chinese government and the U.S. Treasury Department, $376.2 billion as calculated by Georgetown Economic Services for CCC using the figures for bilateral trade with China issued by 39 trading partners that account for more than 80 percent of its trade.

"There is no way on God's green earth that counting in China's service balance is going to mitigate these huge trade-balance surpluses that the partner data show the Chinese running every single month," McGrath observed.

The relevance of McLaughlin's first point -- that the official data are being used because they are official -- may lie more in the realm of political sensitivities than economic analysis.

In collating the CCC figures, Georgetown Economic Services used U.S.-China data from the Census Bureau, which put the countries' 2005 bilateral trade balance in China's favor by over $200 billion -- well above China's official figure of $116.6 billion for its surplus with the U.S., and even one-third again as high as China's figure for its worldwide merchandise trade surplus.

"The frustrating thing about this is that both Treasury and the [International Monetary Fund] appear to be making very important policy decisions based upon the wrong numbers," said Hartquist. "We would never stand for that within the United States government. If the administration or Congress is working on regulations or passing laws, they want the correct data in order to make a proper analysis."

CCC is not alone in questioning Treasury's view of China's currency practices. Addressing then-Treasury Secretary John Snow at a May 18 hearing on the agency's currency report, Sen. Charles Schumer (D-N.Y.) called the language exculpating China a "legalistic dodge."

Schumer, co-sponsor with Sen. Lindsey Graham (R-S.C.) of a bill (S. 295) that would impose a 27.5 percent duty on Chinese goods as a countermeasure for China's alleged exchange-rate manipulation, charged that Treasury's report was worded to allow the administration to escape "stating publicly what's obvious to all of us: China is a manipulator and the administration is simply afraid to say so."

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