12 June 2007

Senate bill aims to press Beijing on currency

The recent (and continuing) rise in bond yields halted, at least temporarily, the stock market's ability to "climb a wall of worry". There is speculation that rising yields are the result of Asian Central banks holding back on purchases of US debt, sending a signal to US policy makers that unpegging China's currency from the dollar could have repercussions for the US economy perhaps not fully understood by US lawmakers. But this isn't necessarily punitive retaliation for aggressive US policy. In the ROTW (rest of the world) the global economy is heating up. As global markets gain strength, there is less reason for China and other exporters with a positive current accounts balance to continue to invest in subsidizing US markets.

In any case the implications for the US housing market are dire. With many adjustable rate mortgages originated in 2005-2006 due to reset these rising rates kick the housing market while it's down.

FT.com / World
Senate bill aims to press Beijing on currency
By Eoin Callan in Washington
Published: June 11 2007 03:00

A bill will be introduced in the US Senate this week that intends to increase pressure on China to float its currency but avoid action that would violate international trade rules, according topeople close to the process.

The legislation is viewed by the Bush administration as the best chance for Congress to let off some steam without blowing a hole in relations with Beijing.

The Senate bill is more moderate than alternatives being floated on Capitol Hill, but will still create headaches for the administration and could become a dividing issue in the next election.

"We don't have any tools to forestall the potential legislation coming down the tracks," said James Baker, former US secretary of state, in a speech on US-China relations.

Lawmakers argue China's weak currency unfairly subsidises the country's exports and contributes to a record annual bilateral US trade deficit of $233bn (€174bn; £118bn). Beijing says it wants to shift the economy towards consumer-driven growth, but fears instability if it moves too quickly.

The Senate bill will serve to step up the pressure after unsuccessful attempts by Hank Paulson, US Treasury secretary, to persuade Beijing to accelerate reform."

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