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The China currency flap: reading between the lines

It's been a bumpy week for US-China relations. This is why it matters.

An employee counts U.S. dollar banknotes at a branch of Huaxia Bank in Shenyang, Liaoning province March 18, 2010. (Sheng Li/Reuters)

BOSTON — The problem is so severe, so potentially explosive, and so threatens the world's largest economy that U.S. lawmakers — Democrats and Republicans alike — this week worked together furiously to solve it.

No, it's not health care reform. It's the so-called manipulation of the Chinese currency.

First, a bipartisan group of senators introduced legislation that would compel the Obama administration to crack down on Beijing for its "manipulation" of the yuan (in English: keeping its currency low so Chinese exports remain relatively cheap).

The proposed measure would establish "new objective criteria" so the U.S. government would have less room to grovel before Beijing — a common criticism of presidential administrations from both parties stretching back, almost, to Richard Nixon's historic trip to China in 1972.

Here's how Sen. Lindsey Graham (R-S.C.) put it this week in Politico, between bites of raw red meat: "The Bush Administration never pulled the trigger on manipulation because we're all living in fear of what China might do. We borrow way too much money from them. And we need to break that fear and do what's right."

At the same time, 130 House members sent a letter to Treasury demanding that unless China allows the yuan to rise, the U.S. impose tariffs on Chinese goods.

Then Thursday, speaking to an audience at Tsinghua University in Beijing, U.S. Ambassador to China Jon Huntsman urged more flexibility in the yuan exchange rate.

“This is a real concern to people in my country. Unemployment is almost 10 percent. It’s a difficult economic period," Huntsman said.  "I’d be misleading you if I left you with the impression that this wasn’t a very, very important issue in the United States, and will continue to be.”

It's not only Americans getting testy with Beijing. Even the French boss of the International Monetary Fund chimed in.

"The opinion of the IMF from this point of view is still that the renminbi (yuan) is very much undervalued," IMF Managing Director Dominique Strauss-Kahn said this week at a conference at the European Parliament, while no doubt looking after the interests of German and French exporters.

Amid the rising currency ire, the Chinese did not stand idly by.

Beijing's Vice Commerce Minister Zhong Shan gave an interview to the Wall Street Journal in which he took a philosophical — and nearly poetic — view toward the growing calls for a yuan revaluation:

"Water doesn't boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree," he warned. Likewise, "a further rise in the yuan by a very small magnitude might cause fundamental changes" to exporters in China.

The sentiment echoes what Chinese Premiere Wen Jiabao said more bluntly in December: “We will not yield to any pressure of any form forcing us to appreciate.” In other words: back off.

So what's going on? Politics, of course. Some economics, too.