EU TAKES ON CHINESE CURRENCY, SOFTLY (ANALYSIS)

London, Oct 4 (IPS) - The European Union is riding in the middle of an escalating currency spat between China and the United States, perceived by many in Beijing as a smokescreen for Washington's efforts to sap China's growth and contain its rise.

The U.S. House of Representatives voted overwhelmingly this week to punish China for its currency policies that favour unfairly Chinese exports at the expense of the United States and other countries. By keeping the value of its currency artificially low, U.S. lawmakers charge, China makes its goods cheaper on the world markets, drives other countries' exporters out of jobs, and creates huge trade imbalances.

EU officials have pledged to add more fuel to the currency heat on China next week when they meet the Chinese prime minister and the country's central bank governor at the Asia-Europe Meeting (ASEM) in Brussels Oct.4-6.

Eurogroup chairman Jean-Claude Juncker said last week that the Chinese yuan currency was still undervalued against the euro and that Europe had to press harder for this to change.

"We have to discuss more formally and with more insistence with our Chinese counterparts the elements related directly to foreign exchange rates. We do think that the yuan, the renminbi, is still undervalued," he said after a meeting of EU leaders.

The currency row has been brewing for years but it is the first time that U.S. lawmakers have united to send such a strong signal of displeasure to Beijing. The bill passed with 348 to 79 votes, opening the doors for tariffs to be imposed on Chinese imports and threatening a full blown trade war between China and the U.S.

In China, the world's leading export powerhouse, the escalation of the currency row is seen as a signal that a long-standing U.S. strategy to contain China's rise is now gaining momentum. Beijing suspects the U.S. is keen on implementing a Plaza Accord scenario that back in the mid-1980s forced the Japanese yen to jump almost 60 percent in a year, undermining Japanese growth and resulting in a two-decade property slump and stagnation for Asia's once most vibrant economy.

Such views are shared not just privately in Beijing. Tan Yaling, head of the China Forex Investment Research Institute, has voiced them publicly, saying the pressure on Chinese currency is only a "chapter in the U.S.'s plan of war on all currencies."

"U.S. government's long-term strategy is to attack all currencies that can pose a threat to the U.S. dollar", she told the China Money weekly. By plotting and applying pressure on the Chinese yuan to appreciate, she said, the U.S. is creating conditions for speculative capital to flood in the country, rapidly raising the value of the yuan. Then when hot money starts withdrawing from the country the Chinese currency is made to bear the brunt slumping in value and losing investors' confidence.

Conspiracy theories have been voiced by other influential economists too. Chen Fengying with the China Institute of Contemporary International Relations has warned that the U.S.'s ultimate goal is to undermine confidence in Chinese currency and push the Chinese economy into the doldrums.

"The U.S. does not have short-term plans, it only has long-term strategy," she told the China Times this week. "When the U.S. dollar was on collision course with the Japanese yen we had the Plaza Accord; when the U.S. dollar had a problem with the euro we had Europe's sovereign debt crisis."

The 25th anniversary this month of the Plaza Accord that trimmed U.S. trade- related deficits by half but stunted Japan's economic rise has given China much ammunition to argue its case against revaluing the Chinese currency.

The Chinese yuan is widely considered by economists to be undervalued -- perhaps by as much as 40 percent -- providing a hefty subsidy for Chinese exports. Chinese officials say they agree the yuan should float more freely, but they have allowed only a limited and slow appreciation of about 2 percent since a new more flexible currency exchange policy was announced in June.

The U.S. complains that trade between the two countries is lopsided: the U.S. trade deficit with China was in excess of 200 billion dollars last year. Members of Congress argue that making the Chinese yuan more expensive is vital to the Obama administration's plans to revitalise U.S. manufacturing and increase U.S. exports as a way of redressing global trade imbalances.

Beijing counter-charges that the currency issue is more about the U.S.'s looming mid-term elections in November and the U.S. administration's inability to pull decisively out of the recession.

"Appreciation of the Chinese currency can only be a temporary measure in boosting U.S. exports," says Wang Jian with the China Society of Macroeconomics. "I cannot buy into the argument that such measures can at this stage realign a global chain of supply and labour division that has been already established so that manufacturing becomes a new driving force for the U.S. economy."

The EU is stepping in the middle of the heated currency dispute, joining ranks with the U.S. in trying to force Chinese currency appreciation.

Beijing has already sent a clear signal to Washington that it will not compromise on the currency front and endanger its exporting jobs. When President Obama voiced his concerns on China's currency intransigence to Prime Minister Wen Jiabao last week on the sidelines of the United Nations General Assembly, he got a reply that China can't bear the brunt of rapid currency appreciation.

The messages to the EU have been more subtle. Announcing Wen Jiabao's attendance of the upcoming ASEM meeting, Fu Ying, vice-foreign minister, stressed China's "positive attitude" on European sovereign debt and pledged China will not take advantage of the union's economic difficulties.

Speaking at a news briefing in Beijing, Fu reminded EU officials that China did not sell its European debt holdings during the crisis and that Beijing has worked hard to reduce its trade surplus with the EU. China has also bought several hundreds of millions of euros in Greek and Spanish bonds.

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