The Coming Battle Between the Yuan and the Dollar?

U.S. senators on Tuesday to discuss a draft bill‎ intended to penalize Chinese imports. The Central Bank of China expressed concern of “trade war”.

It’s like new skirmish in the battle between the yuan and the dollar: U.S. senators want to take things in hand to restrict Chinese imports to the United States, accused of causing unemployment in a demoralized economy. Despite the risk of strained relations between Beijing and Washington, politicians of all persuasions have voted by 79 votes against 19 for the opening of debate on the “Currency Exchange Rate Oversight Reform Act.” In debate on Tuesday, the bill, which does not name China, intended to penalize imports from countries undervaluing its currency by imposing a compensatory tax.

Beijing is accused of curbing the appreciation of the yuan to promote exports, while the U.S. trade deficit with China reached a record $ 273 billion in 2010, up 20% year on year. Every day, the Chinese central bank sets a “pivot” around which the yuan can fluctuate by plus or minus 0.5%. In two years, the Chinese currency has gained a percent against the dollar. Supporters of the legislation argue that the yuan could be worth up to 40% less than its actual value.

“They use the rules of free trade when it suits them, and they ignore them when it suits them,” complained Democratic Senator Charles Schumer, one of the main supporters of the Act. Harry Reid, leader of the Democratic majority in the Senate, also referred to “an unfair competitive advantage in the markets” “It hurts our economy, it destroys American jobs.” Same story on the Republican side: “I hope that the vote in the Senate today will wake up the Administration.” “I hope that the vote in the Senate today will wake up the Chamber of Deputies,” says Senator Lindsey Graham.

On Chinese side, the reaction was immediate, the Central Bank of China has expressed concern of “a trade war that we do not want to see.” For its part, the Chinese Ministry of Commerce assured that the exchange rate of the yuan was not responsible for the trade surplus with the United States. Finally, the Chinese Foreign Ministry accused the bill “seriously infringe the rules of the World Trade Organization.” The spokesman urged Washington “to abandon protectionism” and “not to politicize economic and trade issues.”