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China denies charge of currency manipulation

Treasury nominee Timothy Geithner's comment surprise Beijing officials who say they fear the U.S. is headed toward protectionism. But it gives hope to some in U.S. who favor taking a hard line.

January 26, 2009|Don Lee

SHANGHAI — In asserting that Beijing is "manipulating" its currency, U.S. Treasury secretary nominee Timothy Geithner raised the hopes of some American politicians and business groups that have long pressed for tougher action against China.

But the reality is that the Obama administration might have even less leverage than the Bush team to persuade the Chinese on the currency and other economic issues, at least for now.

Chinese government officials over the weekend denied allegations of currency manipulation and raised concerns that the U.S. was moving down a dangerous path of protectionism.

Some Chinese scholars were more critical of Geithner's statements, calling them arrogant and counterproductive, although they agreed it was too early to say whether the new White House would be taking a harder line in dealing with China than its predecessor.

"It's certainly not politically smart," said Shen Dengli, dean of the Institute of International Studies at Fudan University in Shanghai.

Nor does it make much economic sense at the moment, he and other analysts said. When China's exports are falling for the first time in years and the U.S. needs Beijing to keep buying American debt, they said, Chinese officials are less likely to feel compelled to give in to American pressure.

What's more, the global financial crisis has hurt U.S. credibility as a responsible economic power, weakening its negotiating hand.

"It kind of erodes moral authority when we screwed up so badly," said Oded Shenkar, a management professor at Ohio State University and author of "The Chinese Century."

In written comments to the Senate Finance Committee last week, Geithner buttressed complaints that the Chinese kept the value of their currency artificially low, making their exports cheaper in the U.S. and giving them a bigger trade surplus. He said the Obama administration would "aggressively" use all diplomatic means to push Beijing to change its currency practices.

The remarks parroted statements made by Obama shortly before his election in November but nonetheless injected fresh hope for manufacturing groups, such as the U.S. Business and Industry Council. The trade group called Geithner's statement a "welcome step forward" in stopping unfair currency policies by China and others that have cost American jobs.

The Bush administration, led by Treasury Secretary Henry M. Paulson, repeatedly pressed the Chinese to change their currency system but stopped short of branding it a currency manipulator, a charge that could lead to sanctions if made formally by the Treasury Department.

In July 2005, Beijing eliminated the yuan's rigid peg to the dollar, allowing it to fluctuate within a narrow band, and the Chinese currency has appreciated about 20% since then. Critics say that the yuan remains undervalued by 20%.

When China's economy and manufacturing sector were booming, it was easier for U.S. officials to argue that a stronger yuan was in China's self-interest. It would help spur domestic spending, they said, and reduce the political and inflationary heat of a Chinese economy growing too fast and accumulating too much trade surplus.

But now China's economic machine is slowing sharply, and shriveled orders from the U.S. and Europe have led to factory bankruptcies, spiraling job losses and a pullback in investments.

After rapidly appreciating in late 2007 and early last year, the value of the yuan against the dollar has hardly budged in recent months. And analysts say the domestic pressure has been for Beijing to allow the yuan to depreciate, not rise.

Mei Xinyu, an economist at the Research Institute of the Ministry of Commerce, said there was "no possibility" that Beijing would allow the yuan to appreciate in this current environment.

If the yuan weakened, that would tend to make American goods more expensive in China's market.

But Mei said that wasn't likely because policymakers don't think that a depreciating yuan would help Chinese exporters that much and could actually backfire, as some domestic manufacturers had hedged against a rising yuan and stood to suffer losses should it fall.

Chinese analysts also were quick to point out that pushing Beijing too hard on the currency issue could cause more harm than good for Americans too. They said Washington should remember how much U.S. debt the Chinese currently hold -- roughly $1 trillion -- and what would happen if China cut its holdings or sharply reduced its future purchases.

Although a massive unloading of U.S. Treasury issues by the Chinese would hurt both sides, the "Chinese will be puzzled" by signs of the U.S. taking a more aggressive approach at a time when the two sides are more interdependent than ever, said Shi Yinhong, professor of international relations at People's University of China.

Of Geithner's statement, he said, "I have to say that this might possibly be the beginning of bad future trends."


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