The challenge for currency supremacy is taking centre stage... this is the point we have been expecting...
Jan. 23 (Bloomberg) -- Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency may trigger renewed tensions between two of the world’s three biggest economies.
Geithner, Obama’s nominee for Treasury secretary, also told senators the administration will press China to “adopt a more aggressive stimulus package” to boost its domestic economy. The remarks on manipulation were a shift from President George W. Bush’s team, which stopped short of using the term in criticizing China’s exchange-rate management.
“The signal this sends is not good” for ties between the two nations, said Charles Freeman, a fellow at the Center for Strategic and International Studies and former top trade negotiator for China at the U.S. Trade Representative’s office. “It opens a Pandora’s box. We need the Chinese to hold onto their Treasury and agency debt.”
Geithner’s comments triggered a drop in Treasuries on concern that demand from China, the largest foreign investor in U.S. government debt, may wane. They may also reignite calls among some U.S. lawmakers for measures to punish trading partners perceived to have undervalued exchange rates.
“What they can’t work out diplomatically we can work out legislatively,” said Representative Charles Rangel of New York, who chairs the House Ways and Means Committee, which has jurisdiction over trade issues, in an interview. “The committee has been saying for years” that China has manipulated the yuan’s value, he said.
Senate Vote
Geithner made the remarks in written responses to questions from Senate Finance Committee members that were posted on the panel’s Web site. The committee voted 18-5 yesterday to approve the nomination of Geithner, 47, who is the president of the Federal Reserve Bank of New York. Richard Durbin, of Illinois, the second-ranking Senate Democrat, said the chamber will start debating Geithner’s nomination at 4 p.m. Washington time on Jan. 26 and will vote at about 6 p.m.
“Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner said. “The question is how and when to broach the subject in order to do more good than harm.” Obama’s team will “forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
Officials at the People’s Bank of China and the Foreign Ministry haven’t responded to faxed questions or phone calls seeking a response today.
Tough Relationship
“China should be expecting a very tough relationship with the new administration,” said Frank Gong, China strategist at JPMorgan Chase & Co., on Bloomberg Television. “China will be a natural scapegoat for the problems in the U.S.”
Gong doesn’t expect China to devalue its currency because the drop in exports is related to a decline in demand, not the price of goods.
“China can’t increase exports by making them cheaper because there is no demand,” he said, adding that a devaluation may prompt similar moves around Asia, heightening the risk of trade war.
The drop in Treasuries sent yields on benchmark 10-year notes to as high as 2.63 percent, the highest level in almost six weeks. The yields were 2.60 percent at 12:23 p.m. in Tokyo.
China held about $682 billion of Treasuries as of November, and overtook Japan as the biggest overseas owner of the debt last year.
‘More Than Annoyed’
Chinese officials “will be more than annoyed -- they don’t like being singled out, and they don’t like countries explicitly criticizing them for the way they run their economy,” said Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington.
Geithner also said in his written responses that there are “no current plans” to request more U.S. financial-bailout funds. He played down any need to nationalize American banks, without specifically ruling out the option.
Former Treasury Secretary Henry Paulson in 2006 formed a new mechanism to engage China in economic talks and defuse tensions, called the Strategic Economic Dialogue. He repeatedly argued that his diplomatic approach would bear more fruit than congressional proposals aimed at protecting U.S. companies against competitors from countries including China.
Yuan’s Gain Stalls
Pressure from lawmakers on China’s currency policy waned in 2007 and the first half of 2008 as Chinese authorities let the yuan rise at a faster pace and as concern rose about a falling U.S. currency. Those trends shifted in the middle of last year, when international demand for dollars rose amid the credit crunch, and China restrained the yuan.
The yuan, also known as the renminbi, traded at 6.8413 per dollar as of 11:42 a.m. in Shanghai, compared with 6.8371 yesterday, according to the China Foreign Exchange Trade System. It reached 6.8 to the dollar in July after advancing for 18 months from more than 8 to the dollar.
In May, Obama signed on as a co-sponsor of legislation aimed at China that would give U.S. companies the ability to petition for import duties to compensate for the effect of a weak currency.
Using a form of the word “manipulation” has legal implications, and the Bush administration steered clear of the term. The Treasury is required to report to Congress on whether other countries are using their currency to gain an unfair trade advantage.
‘Unfair Advantage’
Under current statutes, designating China a currency manipulator would have little immediate effect. The 1988 law requiring the report requires only that Treasury begin talks with the offending country “to eliminate the unfair advantage.” The last country to be branded was China in 1994.
Some U.S. manufacturers lobbied Paulson and his predecessors to classify China as a currency manipulator. He refrained from doing so, arguing that talks about fair U.S.- China trade policies already were under way and that official designations might inflame relations with the Chinese.
Geithner from 1998 to 2001 ran the Treasury’s international department, which compiles the semiannual foreign-exchange report that includes any “manipulator” designations.
The nominee said the Treasury plans to make a “fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.”
The U.S. China Business Council, which represents large exporters such as Caterpillar Inc., Cargill Inc. and Ford Motor Co., has urged the U.S. to refrain from sanctioning China through legislation and instead to continue the Bush administration’s effort to engage America’s second-largest trading partner.
“A single-minded focus on China’s currency is a distraction,” the group said in a report on Jan. 14. “China’s exchange rate is not the significant factor in the bilateral trade balance many make it out to be.”
