U.S. currency legislation less of a threat for China

U.S. legislation pressing for a rise in the yuan currency looms as less of a threat for China on the eve of President Hu Jintao's visit to Washington, now that Republicans control one house of Congress.

But the issue is far from dead on Capitol Hill and could reignite, especially if the U.S. economy fails to improve as expected and the Chinese are seen to drag their feet on letting their currency appreciate.

With the U.S. economy still struggling as China's economy booms, it is popular in the United States to criticize China for currency manipulation. It's made easier by the fact that they deserve it, said Bill Reinsch, president of the National Foreign Trade Council, a business association.

Many U.S. lawmakers believe China keeps the yuan undervalued by 15 percent to 40 percent to give its companies an unfair price advantage in international trade. They hope President Obama, a Democrat, will pressure his Chinese counterpart over the issue during Hu's state visit January 19.

Historically, Republicans have tended to be less protectionist than Democrats. Threatening protectionist trade practices isn't a pathway toward restoring the American economy, one influential House Republican, Representative Mike Pence, told Reuters last week.

Treasury Secretary Timothy Geithner served notice on Wednesday that the United States was unsatisfied with the extent of the yuan's has risen since Beijing introduced a more currency flexibility policy in June.

Separately, a senior administration official told Reuters this week Washington is seeking a real, demonstrative commitment from China that it is serious about shifting its economic policy away from export-led growth.

Such a commitment might help assuage China's critics in Congress, who are already talking about reviving legislative efforts to punish China in the new session of Congress.

It's one of the things that's seriously on the table, Democratic Senator Charles Schumer told Reuters last week. He has been trying to pass legislation since 2005, when he and Republican Lindsey Graham proposed slapping a 27.5 percent tariff on Beijing's exports to the United States.

Some Republicans in the House of Representatives, where they now have a majority, want to try again. Rep. Tim Murphy, a Republican, co-sponsored a bipartisan yuan bill that passed the House last year, but was not taken up in the Senate.

Murphy told Reuters recently his legislative effort in the new Congress could be broadened to address other alleged Chinese trade abuses.

REPUBLICANS WERE SPLIT LAST YEAR

But Republicans split over the China currency issue last year. Ninety-nine House Republicans voted for the currency bill in September, but Republican leaders all voted against it -- including John Boehner, who is now Speaker of the House, and Eric Cantor, who is now majority leader.

Still, concern about China persists. Murphy said he was reviewing the idea of a comprehensive China trade bill with his fellow Republican Dave Camp, who now chairs the House Ways and Means Committee that deals with trade issues.

Camp last year voted for the China currency bill. But he said then there were far larger trade issues Congress needed to address, including China's indigenous innovation policy.

That refers to Chinese attempts to promote domestic innovation by imposing unfavorable terms on U.S. and other foreign companies, such as requiring them to develop and register intellectual property in China.

Business leaders like U.S. Chamber of Commerce President Thomas Donohue agree some of China's other trade practices may be more damaging to U.S. interests than its currency policies.

In any case, pressing China for an immediate sharp rise in the value of its currency could be bad for both countries, Donohue said Tuesday. The Chinese could simply drop the price of the products and that would have a more negative effect, Donohue told Reuters Insider.

With seasoned House Republicans split over the wisdom of hitting out at China, one group to watch are the new Republican lawmakers who got elected with the backing of the Tea Party.

The Tea Party was all over the map on trade issues, Reinsch said, so it's unclear how their sympathizers would vote. Some were libertarian but others America First.

Dan Ripp of Bradley Woods, a private firm that tracks Washington for institutional investors, thinks it unlikely both houses of Congress will pass a China currency bill.

My hunch is that Republicans in the new Congress understand that forcing China to appreciate its currency would debase the U.S. dollar, Ripp said. He also dismissed efforts to crack down on China as a dumb populist idea.

But Democratic Senator Sherrod Brown, a backer of the Schumer effort, said: Tell the people who are losing their jobs in this country, that it is a 'stupid populist idea'.

(Additional reporting by Paul Eckert and Doug Palmer; editing by Todd Eastham)