BEIJING | Fri Oct 15, 2010 6:04am EDT
BEIJING (Reuters) - Expect harsh words but no concrete retaliation from Beijing if the United States labels China a currency manipulator in a report due later on Friday.
China is focused on trying to defuse tensions with the United States by yielding some ground in a mini-burst of yuan appreciation and hopes that these efforts will still pay off, even if Washington brands it a manipulator.
But should the United States ratchet up the pressure yet further by passing into law a bill that could penalize China, Beijing will not be so docile, Chinese analysts say.
"China is telling the United States that it is willing to help to resolve the problems. Things have not gotten out of hand yet and both sides still have some room to maneuver," said Zhao Xijun, an economist at Renmin University in Beijing.
President Barack Obama's administration faces a deadline on Friday to decide whether to formally label China as a currency manipulator.
A desire to look tough on "unfair" trade practices ahead of U.S. congressional elections on November 2, in which Obama's fellow Democrats are battling to retain control of Congress, could tempt the administration to cite China for the first time in 16 years.
The Chinese commerce ministry made its feelings clear on Friday, warning the United States not to make a scapegoat of the yuan. Rhetoric aside, though, Beijing knows that the currency manipulator designation carries no specific consequences, apart from forcing Obama to seek consultations with China.
PREPARING FOR THE WORST
A different calculus would apply if the Senate approved a bill already passed by the House of Representatives that would allow the United States to slap duties on countries with undervalued currencies.
"It will be a very serious issue if the U.S. legislation is approved by the Senate and signed by the president," said Li Wei, a researcher under the commerce ministry.
For starters, China would challenge the U.S. law at the World Trade Organization -- a case that some trade experts think China would be able to win.
Analysts say Beijing is also bracing for the law by considering possible retaliation, from imposing curbs on U.S. businesses in China to the so-called nuclear option of dumping its holdings of U.S. Treasuries.
But Beijing is not going to jump the gun. It is first taking what it sees as pre-emptive steps to keep U.S. anger from boiling over -- and to keep the legislation from becoming law.
"If China doesn't let the yuan appreciate a little bit, foreign criticism will be stronger. China wants to avoid a trade war with the United States," said Guo Tianyong, an economist at the Central University of Finance Economics in Beijing.
To that end, Beijing has allowed the yuan to gain 2.6 percent since it scrapped a 23-month dollar-peg on June 19, quickening the appreciation in recent weeks as pressure mounted.
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