China urges Obama to block 'protectionist' act

Washington's effort to force Beijing's hand may have the opposite effect, at least for now. Currency investors are already pricing in the risk that China could tighten its leash on the yuan to demonstrate its grip over the currency.

The bill is a protectionist step that “gravely violates World Trade Organization (WTO) rules,” Foreign Ministry spokesman Ma Zhaoxu said after the U.S. Senate approved it in a 63-35 vote and sent it to House of Representatives.

“China urges the U.S. government, Congress and all quarters to resolutely oppose using domestic legislation to create a fuss about and put pressure on the renminbi exchange rate,” said Ma in comments on the ministry's website.

The “renminbi”, or “people's currency,” is another name for China's yuan currency.

The legislation will “disrupt the shared efforts of China and the United States, as well as the international community, to promote vigorous recovery and growth in the global economy,” said Ma.

His condemnation was echoed by China's Ministry of Commerce and the People's Bank of China, the central bank, which said the yuan exchange rate was “reasonable.”

Chinese officials and media have warned that the legislation could trigger a “trade war” of escalating protectionist tit-for-tat retaliation.

China's official Xinhua news agency said on Wednesday that “what the U.S. Senate did planted a ticking time-bomb that may ignite a potential trade war.”

Bluster

On the face of it, China has major weapons to strike back at the United States if the currency legislation is passed. It is America's biggest foreign creditor and its fastest-growing major export market.

But such shapeless threats are more bluster to reassure domestic audiences than a real option, said Yi Xianrong, an economist at the Chinese Academy of Social Sciences, who said the risk of an escalating cycle of trade retaliation was scant.

“A trade war won't break out, it just won't. It's just to give it a scare,” he told Reuters of the warnings from Beijing to Washington.

“The reaction has been excessive. Many people have called for payback by selling off (Chinese holdings of) U.S. government debt. That would be utterly foolish,” he added.

But China could nonetheless adopt retaliatory steps against some U.S. goods and companies if the bill ever passes into law, said several other economists and foreign policy analysts.

Although the currency bill faces high hurdles to becoming law, Beijing appears worried that it could signal more feuding with the United States in 2012, when President Barack Obama faces a tough fight for re-election and China's Communist Party will navigate a leadership handover.

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