As everyone has probably heard by now, Treasury Secretary Geithner announced over the week-end that he would delay the decision on whether to label China a currency manipulator. From the press release:
I have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15. There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time.
As part of the overall effort to rebalance global demand and sustain growth at a high level, policy adjustments are needed that measurably strengthen domestic demand in some countries and boost saving in others. These are also important to ensure robust job growth. In the United States, private savings has increased, the current account deficit has fallen, and the President has outlined a series of measures to reduce our fiscal deficit.
Countries with large external surpluses and floating exchange rates, such as Germany and Japan, face the challenge of encouraging more robust growth of domestic demand. Surplus economies with inflexible exchange rates should contribute to high and sustained global growth and rebalancing by combining policy efforts to strengthen domestic demand with greater exchange rate flexibility.
This is especially true in China. China's strong fiscal and monetary response to the crisis enabled it to achieve economic growth of nearly 9 percent in 2009, contributing to global recovery. Now, however, China's continued maintenance of a currency peg has required increasingly large volumes of currency intervention. Additionally, China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.
Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months.
NEC Director Larry Summers says the decision was not about non-trade issues, such as Iran sanctions:
TAPPER: There are a lot of members of Congress who are concerned about jobs because of China, because of what they see -- the manipulation of currency by China. The Obama administration had scheduled a semi-annual report to Congress on currency, in which it was going to state whether or not the Obama administration believes the currency is being manipulated. That report, we learned this weekend, is going to be delayed.
Is it going to be delayed because the Obama administration needs China's cooperation on other things, such as sanctions against Iran?
SUMMERS: No.
TAPPER: That's not the reason?
SUMMERS: No, it's being delayed because that's part of our international economic dialogue, which is directed at supporting a crucial issue for jobs creation, doubling our level of exports, and that depends on what other countries do.
We've got three major meetings, a meeting of the G-20 finance ministers, our strategic dialogue that takes place every year with China, and then the president's meeting, building on the forum he created in London and Pittsburgh last year of the G-20 countries.
Those are opportunities to engage with China, to engage with other countries that have large trade surpluses, other countries who think they can continue to rely on the United States as an importer of last resort. And Secretary Geithner's judgment -- and I think it was the right one -- was that we could report and recommend to Congress, you know, a much more effective way after we had had those meetings and taken stock of what kind of measurable progress we were able to generate out of those dialogues.
The reaction so far:
The delay is wise. Long may it continue. Hu Jintao, China’s president, has just announced he will attend a summit on nuclear security in Washington this month. The US continues to hope that Beijing will sign up to sanctions against Iran. Sacrificing agreements in these and other areas to make an empty gesture on the renminbi or, worse, to launch a series of escalating trade disputes, would be mad.
Obviously, the US move allows a few months' worth of breathing space after Hu Jintao comes along for Obama's nuclear shindig, so don't take it for granted just yet that Geithner will wimp out for a third consecutive time on labelling China a manipulator. More so now, it may depend on what Beijing indicates in the upcoming economic meetings. Nevertheless, it's notable how even this usually token report is delayed in the interest of handling a particularly recalcitrant country from Washington's POV.
“I’m disappointed that Secretary Geithner is delaying publication of the Department’s exchange rate report. Everyone knows China is manipulating the value of its currency to gain an unfair advantage in international trade. If we want the Chinese to take us seriously, we need to be willing to say so in public. The past few years have proven that denying the problem doesn’t solve anything. The Treasury Department should cite China as a currency manipulator. I renew my call for the Administration to prepare a WTO case against China under Article XV of the General Agreement on Tariffs and Trade.”
... I must admit that I'm torn about this decision. On the one hand, it's a good sign that the Obama administration is trying to use quiet diplomacy, as opposed to direct confrontation, to deal with the currency issue. That's certainly a positive thing, as any aggressive unilateral response would probably (a) cause China to stubbornly delay RMB appreciation due to the government's paramount need to appear "strong" on the global stage; and/or (b) end up hurting American consumers and exporters.
On the other hand, I'm concerned that Geithner's move might be too clever by half. By delaying the Treasury report, the US government still appears to be using it as a Damoclean sword to push China to appreciate its currency. This move clearly turns the report into a US ultimatum tied directly to Yuan movement (i.e., "appreciate or else!"), rather than a regularly scheduled, legally-mandated bureaucratic event. ...
Making this shift via G-20 and bilateral channels -- rather than in response to a Treasury finding of currency manipulation or Congressional threats of protectionism -- gives China a more politically palatable justification for policy change. Beijing will likely move in the right direction, albeit more slowly than anyone else would like.
And, if nothing happens from these meetings, China can be named in the fall. Indeed, the paradox of two-level games is that there needs to a rising but manageable possibility of protectionist action by the United States to give China an incentive to alter their policy.
What does the future hold? A NY Times piece suggests that revaluation of the Yuan may be coming soon:
... the announcement by Chinese authorities on Thursday that President Hu Jintao will be visiting Washington in two weeks is being seen as the beginning of a possible easing of the friction over the renminbi.
China experts said it was unlikely that China would have agreed to the visit unless there was at least an informal assurance by the Treasury Department that it would not be named a currency manipulator either on or around April 15 — the deadline for the Obama administration to submit one of its twice-a-year reports on foreign exchange to Congress.
At the same time, economists say the visit, and other Chinese moves, suggest China is finally willing to let the renminbi increase in value. Analysts at HSBC, the Hong Kong-based global bank, declared that “the latest development should make it more likely for Beijing to start moving away from the renminbi’s current de facto peg within the next few months, if not weeks.”
Before the disclosure of Mr. Hu’s trip, Goldman Sachs said that China seemed increasingly likely to allow the renminbi to begin a modest appreciation in the next three months. Helen Qiao, the China economist for Goldman Sachs, and others who have spoken with officials in Beijing said that the currency issue appeared to be under active discussion there.
