Treasury Secretary Geithner: Barking Up The Wrong Tree

Through Timothy Geithner, the new Treasury Secretary, the Obama Administration has signaled that the relationship between the United States and China may be headed for choppy waters. In written testimony for his confirmation hearing, Mr. Geithner said that President Obama, “backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”

The reaction in Beijing was immediate. Over the weekend, Su Ying, vice governor of the People’s Bank of China said:

In recent days persons in a Western country have said ‘China is manipulating the yuan exchange rate. These remarks are not only inconsistent with the facts, but they are misleading about the reasons for the financial crisis.

With foreign experience so limited among US government officials and lawmakers, we had hoped for better from Mr. Geithner, who spent most of his childhood outside the United States, has considerable international experience and has studied Chinese.

Mr. Geithner’s Mandarin and China studies don’t seem to have made him more sensitive to China’s concerns. Apparently, the Treasury Secretary doesn’t appreciate that China is fighting for its own economic survival in this time of global financial crisis, a crisis caused largely by forces outside of its control; or that thousands of businesses have already closed in China, millions of out-of-work migrant workers have returned home and that China must create at least 10 million new jobs each year to keep unemployment at reasonable levels. While the good Senators who approved his nomination might applaud his comments, his words will fall on deaf ears in Beijing.

As Mr. Su went on to say in his criticism of Geithner’s comments:

Countries should avoid using “excuses” to advocate protectionism. This does not help to weather the financial crisis and is not conducive to the promotion of the healthy and stable development of the global economy.

Apart from being a policy that Beijing will never embrace in this environment, advocating a weaker dollar versus the yuan, at a time when the China holds such a large amount of U.S. treasury securities, is the wrong policy for the United States. The Wall Street Journal analyzed it this way:

This would seem to be an especially crazy time to undermine the dollar, given that the Treasury will have to issue some $2 trillion to $3 trillion in new dollar debt in the next couple of years. A stronger yuan would also contribute to Chinese deflation and slower growth, which would only mean a deeper world recession. Even the Bush Treasury never formally declared China to be a currency “manipulator” in its periodic reports to Congress.

If the Obama Treasury is now going to take that step, hold on to those gold bars. We’re in for an even scarier ride than the Fun Slide of the last few months.

Because slower exports to the United States are due to falling demand, not relative pricing, there is little benefit to China of a cheaper yuan. In the face of export weakness, however, China also has no incentive to have the yuan appreciate against the dollar. Whatever pressure Washington may try to exert, look for the yuan to stay right where it is for the rest of the year, at approximately 6.8 to 1.

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