Perhaps it is a bit cynical to suggest that this week's visit to China by Senators Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) is grandstanding. But it does appear that they used the trip to provide cover for delaying a full vote on their bill, which would impose a 27.5% tax on all Chinese imports if China does not allow the yuan to appreciate significantly with six months of passage of that bill. Recent comments from both Schumer and Graham have been somewhat more conciliatory, even though both men continue to express some criticism over the pace of the move. A formal decision is expected next week as to how the senators will proceed, but there are strong indications that they will postpone the consideration of their bill until at least late April. Two key events will take place in April, and one has to suspect that a vote on the bill before these events will not be helpful:
People's Republic of China (PRC) President Hu will visit the U.S. and meet with President Bush and several other top officials.
The U.S. Treasury will issue its report on currency market manipulation.
I have consistently argued that the likely decision to cite China as a currency-market manipulator is largely meant to deflect or steal the thunder of more protectionist measures being considered by the U.S. legislative branch. Such a citation is largely toothless, as it requires bilateral negotiations, but it might be sufficient to demonstrate to Congress that the executive branch will ensure that the PRC moves in the right direction. Schumer was very clear: Events over the next "month or so" likely will determine whether he pushes for a vote on his bill. Surely most reasonable observers would recognize that China has taken steps to build the institutional capability and mechanisms that allow for a more flexible currency. For example, since the market-maker system was introduced earlier this year, the pace of yuan appreciation appears to have accelerated, and the volatility appears to have increased. The real problem then is the pace of change -- not the direction.