Hu faces critics in Congress, economic pressures back in China

China's President Hu met with US congressional leaders Thursday, amid reports that his country's economy may be overheating, driving up inflation. Is export-dependency the root of the problem?

For all its strengths, China's economy confronts a difficult squeeze that was on display Thursday as President Hu Jintao held closed-door meetings with members of Congress in Washington.

Mr. Hu met with congressional leaders who are less patient than President Obama over alleged unfair trade practices by China. If Beijing won't change its currency policies, US lawmakers are threatening that America could impose financial penalties on "Made in China" imports.

Hu also confronts pressures at home. The need to generate new jobs tilts policymakers toward the status quo – a push to promote exports and to invest in China's infrastructure. But growth numbers from China's government Thursday also amplified concerns about inflation and possible "overheating." Those concerns could nudge Chinese leaders, over time, toward reforms designed to stabilize the economy.

IN PICTURES: Hu Jintao's Washington visit

The competing pressures underscore that China's economy has significant weaknesses, even at a time when Americans are prone to view China as the world's leading economic power. (In a Pew Research Center poll this month, 47 percent of Americans gave that title to China, while 31 percent chose the United States.)

"China has an increasingly turbulent economy, heavily dependent on exports," Gordon Chang, a writer and former lawyer in China, testified Wednesday to the House Foreign Affairs Committee.

But what should this mean for the trade policies that occupy center stage during this week's bilateral meetings?

In statements this week, Congress appears to be torn two ways.

Some blended criticism of China with a conciliatory tone. House Speaker John Boehner (R) faulted Beijing on human rights but said the two nations' "deep economic ties have helped create new American jobs and expand both of our economies." He said the trade partners should "continue to resolve our differences in ways that benefit both of our countries and our people."

Others say Congress should ramp up pressure for currency and trade reforms, with the goal of reducing America's trade deficit and creating US jobs. Backers of this idea include Democratic Sens. Charles Schumer of New York, Bob Casey of Pennsylvania, and Debbie Stabenow of Michigan.

"China has been allowed to develop an unfair advantage while going virtually unchecked," Senator Casey said in a statement Monday. "A comprehensive approach is required to level the playing field."

Such legislation would give less flexibility to the Treasury Department in deciding whether to cite nations such as China for currency manipulation. It would impose stiff penalties on currency violators, including duties on exports and a ban on US government contracts.

Some economists, however, caution that such an approach could backfire, if it results in tit-for-tat trade barriers rather than a loosening of the yuan exchange rate. While conceding that some Chinese trade practices harm US businesses, they argue that the greatest risk to the global economy would be a reversal of the trend toward expanding global trade. With both the US and Chinese economies now growing, the hope is that rising commerce will help the world achieve a sustained recovery.

China's economy grew at a 9.8 percent annual pace in the fourth quarter of 2010, according to the government numbers released Thursday. That's similar to its pace for the whole calendar year, but China's government appears to be struggling to contain the supply of money – and the price pressures that result. Inflation in China, already higher than the government would like to see, could accelerate, many economists say.

Inflows of foreign capital and loose lending by Chinese banks have spawned "rampant credit creation," economists Alistair Thornton and Todd Lee of IHS Global Insight said in an analysis of the numbers. Still, although some economists warn of asset-bubble risks to China's economy, they argue that inflation has not reached dangerous levels so far.

IN PICTURES: Hu Jintao's Washington visit