Reuters US politicians readily muscle up to talk tough against China on the campaign trail, charging its policies undermine American manufacturing, but two key planks of the argument for criticizing Beijing are crumbling. The Chinese currency has risen 31 percent against the dollar over the past seven years, eroding a chunk of the price advantage Chinese exports once enjoyed on world markets. At the same time, China's huge trade surplus with the world has shriveled. Yet Republican White House hopeful Mitt Romney says at every turn that as president he would declare China a currency manipulator from day one, and he regularly criticizes Beijing for unfair trade practices. President Barack Obama, a Democrat, used the backdrop of a lock factory in America's industrial heartland in February to berate China for failing to “play by the same rules” on trade. Experts say the United States increasingly will have to temper its tone toward China on economic policies — at least behind closed doors — given that the raw argument of currency manipulation no longer holds as much water. “The US should be praising China for reducing its external surplus so rapidly since 2007,” said Nicholas Lardy, a China expert at the Peterson Institute for International Economics. The head of the institute, C. Fred Bergsten, has been a leading critic of China's currency, saying the yuan was 40 percent undervalued. But Lardy says the gap is now “very modest, not more than 10 percent.” More important is to focus on keeping China's external surplus in check, he said. China's current account surplus, the broadest measure of its trade with the world, fell by almost one half in 2011 to $155 billion, well below the 4 percent of GDP level considered a benchmark for a balanced external account. That is a big move down from its peak above 10 percent in 2007. The question is whether China's surplus will remain in check once global growth accelerates. The decline probably reflects a mixture of a rising currency, a shift inside China toward domestic consumption and hence more imports, and sluggish demand from advanced economies for its exports. The IMF is studying the issue, but Managing Director Christine Lagarde signaled on Thursday that the shift toward more balanced Chinese growth appears longer lasting. She said it looks as if China's external surplus will be in the 4 percent to 5 percent range, not 7 percent as forecast six months ago, though it could move up again. “We believe there is more work to be done for the rebalancing to take place, but it is moving in the right direction,” she said at a Brookings Institution conference. The IMF's view is significant because its reading of a 10 percent external surplus had provided a major basis for the U.S. argument since 2008 that China's currency was substantially undervalued. Already, Chinese Premier Wen Jiabao has signaled that the days of Beijing engineering major yuan appreciation are largely over. He said in mid-March that the currency “is possibly near an equilibrium level” and that China will focus on speeding up work on exchange rate reform — a necessary precursor to floating the currency. __
