Tension mounts as China and US trade insults over currency

Chinese complain about US legislation designed to penalise their exporters

China has warned US lawmakers they are playing with fire by promoting a new law to impose trade sanctions on the country over their currency dispute. The Chinese authorities yesterday lashed out at Congressional moves they said amounted to protectionism, raising the temperature ahead of several important international summits.

The latest developments in the dispute over the value of the renminbi, which US politicians say is being held artificially low to give Chinese exporters a competitive edge, comes in the same week that Brazil's finance minister said countries were engaged in a dangerous "international currency war", designed to boost their own economies with undeclared, gradual, beggar-thy-neighbour devaluation.

The US House of Representatives overwhelmingly passed a Bill to levy tariffs on goods from countries judged to be undervaluing their currencies. The measure is aimed squarely at China, whose growing economic power has become a significant issue in mid-term elections in a country suffering from 10 per cent unemployment.

"Exercising protectionism against China under the excuse of therenminbi exchange rate will only severely damage Chinese-US trade and economic ties," Jiang Yu, spokesman for China's foreign ministry, said. "We firmly oppose the US Congress approving such bills, and urge the Congressmen to be clearly aware of the importance of China-US trade andeconomic relations, resist protectionism so as to refrain from any damage to the interests of both peoples and people around the world."

In a move apparently designed to show that the Chinese authorities would not give in to threats from the US, the government set the reference exchange rate lower last night and the renminbi fell in value against the dollar for the first time in 13 days. It was down 0.07 per cent to 6.6912 per dollar in Shanghai, according to the China Foreign Exchange Trade System, having risen 1.74 per cent over the whole of September.

The Bill passed by the House of Representatives is far from becoming law. The Senate will not take it up until after the mid-term elections on 2 November, and the Obama administration has not taken a position on whether the President would sign such a law.

China promised in June it would loosen some of the bonds on the renminbi and allow it to float more freely against the dollar, but the US hasexpressed frustration that the upward drift has been so slow. In negotiations with the Chinese, it has pointed to Congressional pressure and urged the Communist regime to act faster. But China's premier, Wen Jiabao, told the US that a sudden upward revaluation of the renminbi could cause unemployment and spark unrest in the country.

Last month, Japan intervened in the currency markets for the first time since 2004, in a signal it would not allow the yen to appreciate further and harm its still weak economy. There have also been currency interventions by Taiwan and South Korea, where G20 finance ministers will gather to debate global trade and currency imbalances among other issues later this month. The issues will also be on the agenda at the International Monetary Fund meeting in Washington next weekend.

Brazil's finance minister Guido Mantega warned earlier this week that currencies were being manipulated byindividual governments, to boost their country's exports. "We're in the midst of an international currency war, a general weakening of currency," he said. "This threatens us because it takes away our competitiveness."

Julian Jessop, analyst at Capital Economics, said that markets are still in control of currencies, and government interventions have so far been modest. "If Japan's actions were the opening salvos in a global currency war, they have proved to be a damp squib," he said. The effect of Japan's intervention on the yen has been largely reversed in the subsequent two weeks, he said, and "the move is still best seen as a gesture to appease domestic criticism of prime minister Naoto Kan".