Fears over trade war and growing protectionism after US Senate vote

BEIJING - China condemned the US on Wednesday after the Senate passed a bill that would punish Beijing for alleged currency manipulation, warning that the proposed legislation risks triggering a trade war.

The bill is essentially trade protectionism, a serious violation of World Trade Organization rules, Foreign Ministry spokesman Ma Zhaoxu said.

The US Senate passed the Currency Exchange Rate Oversight Act, 63-35, which threatens to punish China for allegedly undervaluing its currency with retaliatory tariffs on imports from China.

The Ministry of Commerce and the People's Bank of China also condemned the vote.

Ministry spokesman Shen Danyang said that the US has sent the "wrong signal by escalating trade protectionism" at a time when the global economy is facing serious challenges.

The People's Bank of China said that blaming China's "undervalued" currency will not solve US domestic problems, such as high unemployment and huge trade deficits, nor will it reduce trade imbalances between the two countries.

"It will also seriously affect China's ongoing foreign exchange reform," the central bank said, noting that China will continue to promote reform of the exchange regime and increase the yuan's flexibility.

Economists said that passing the bill was an unwise move which would dampen global economic activity and sentiment and increase the probability of a double-dip recession.

"It is an untimely move given that the US and China need to work together to prevent another financial crisis and global recession," Huang Yiping, chief economist of emerging Asia at Barclays Capital, said in a research note.

The Xinhua News Agency called the currency bill a "ticking time-bomb" that may ignite a trade war.

Most analysts believe that the likelihood of an all-out trade war is slim, but they said China could still adopt retaliatory measures.

"In the unlikely scenario that the bill becomes law and the US penalizes Chinese exports, China might retaliate, for instance by taxing US multinationals in China," Huang said.

US economists also expressed concerns about the damage the bill may do to trade relations.

"It is certainly not good news as US-China tension is the last thing investors need," Panos Mourdoukoutas, professor and chair of the Department of Economics at Long Island University, wrote in his column in Forbes magazine.

"Particularly vulnerable are major US multinationals with a large presence in China," he added.

The American Chamber of Commerce in China opposed the bill on Wednesday, saying that the provisions of the bill are unnecessary and would be counterproductive to the goal of protecting US employment.

"The Senate bill would damage the bilateral trade and investment relationship, weaken our standing in the World Trade Organization and damage our national interests," AmCham-China Chairman Ted Dean said.

Most analysts speculate that the possibility of the bill becoming law is slim as it faces opposition in the Republican-led House of Representatives and the White House.

Philip Levy, an economist with the American Enterprise Institute, a public policy think tank, said that the passage of the bill in the Senate signaled the political pressure to "get tough" on China but the Republican leadership in the House did not believe the bill to be a useful and effective approach.

"President Obama has also indicated some concerns although he has not yet put out a veto threat," he said.

China and the US held a second round of talks on Tuesday on Asia-Pacific affairs, and the currency was a major topic.

Some analysts said that China should not be too concerned as the bill is a political gesture to calm frustration among US voters ahead of the presidential election next year.

"The bill is more of a gesture by the Senate to press the US government harder and to show voters that they really care about their interests," said Zhou Qi, a researcher at the Chinese Academy of Social Sciences.

The yuan on Wednesday fell briefly against the US dollar but later recovered. Analysts interpreted the fall as an indication that China will move at its own pace on currency issues.

Economists forecast that the yuan will continue to appreciate by about 5 percent this year against the dollar.

Tan Yingzi in Washington, Ma Liyao and Cui Haipei in Beijing contributed to this story.