BOSTON—China's leaders may have misread U.S. political sentiment in taking a confrontational stand on its currency policy, analysts say.
Speaking at the close of the National People's Congress session, Premier Wen Jiabao vowed to maintain China's controls on the yuan after years of U.S. complaints that the currency is kept artificially low to compete unfairly on trade.
On March 15, 130 members of the U.S. House from both parties signed a letter urging the Obama administration to impose countervailing duties on Chinese goods. One day later, 14 senators announced bipartisan legislation that could also lead to tariffs if China fails to revalue the yuan.
Experts say the swift reaction shows the breadth of congressional sentiment on the currency conflict, despite partisan divisions over other issues like health care.
Did China 'miscalculate'?
Patricia Mears, director of international commercial affairs at the National Association of Manufacturers, said China may have miscalculated because of the partisan debates taking place in Washington at the same time.
"In the past, China has been warned repeatedly about possible congressional action, and I think they had started to believe that this was not going to be. They started to feel that this was a negotiating tactic on the part of the United States," Mears said.
Derek Scissors, research fellow for Asia economic policy at the Heritage Foundation in Washington, said China's government misjudged the strength of opposition to its currency policy among both Democrats and Republicans.
"They were not ready for...the extent and speed of the bipartisan anger that has been aroused against Chinese trade practices," Scissors said.
"Part of that was thinking that we were occupied elsewhere, such as in health care, and part of it was just not understanding that American politics can turn very quickly."
No sign of compromise
U.S. exporters have argued for years that China undervalues the yuan by 25 to 40 percent, giving its goods a price break that drives its $226-billion trade surplus with the United States.
China allowed a gradual appreciation of its currency in 2005 to head off an earlier tariff threat, but it has virtually frozen the value against the dollar since 2008 due to economic concerns.
Analysts believe that Beijing will compromise by resuming its slow appreciation as the U.S. Treasury Department prepares a required April 15 report that could brand China as a "currency manipulator."
Under a 1988 trade law, the designation could lead to tariffs that would offset the exchange rate break.
But if compromise is coming, China's Vice Minister of Commerce Zhong Shan gave no sign of its during a visit to Washington last week.
"The Chinese government will not succumb to foreign pressures to adjust our exchange rate," Zhong told reporters, according to The New York Times. Zhong called the tariff threat "unacceptable to China."
On March 18, Zhong also argued against a stronger yuan, telling The Wall Street Journal that the profit margin on many Chinese export goods is less than 2 percent.
Appreciation "would endanger more exporters' survival, which China can't afford," Zhong said.
'Tougher times ahead'
Analysts say there may be tougher times ahead for Chinese exporters, but the currency issue cannot be ignored.
"There's no doubt that this is one of the problems of China's over-reliance on an export-led growth strategy," said Mears.
"Sooner or later, this was going to happen. Sooner or later, there's going to have to be pain in this readjustment, just like there's pain in the United States," she said.
Derek Scissors said that difficult conditions for China are the result of its own delay in facing the exchange rate problem.
"I don't think there's a legitimate excuse for inactivity," he said.
Scissors said China failed to address appreciation pressures when export profits were high.
"You can't have incredibly prosperous days for years and refuse to reform, and then wait for things to get tough and say, well, now we can't reform," Scissors said.