China Unhappy About Yuan Manipulator Taunt

This place was among the first to note Timothy Geithner's more aggressive stance against China's foreign exchange policy. The New York Times has since covered the issue and so has fellow blogger Yves Smith. Trying to be at the forefront, it's my sworn duty to report that Chinese officialdom is not taking this accusation in stride as the following Reuters article notes. However, for someone curious about the outcomes of a possible trade war, I am not touting deliverance just yet as both sides are holding back from laying down the gauntlet with no chance of turning back. The text of the testimony is here (HT Trade and Taxes).

Again, the US Treasury issues biannual reports determining whether trade partners are practicing currency manipulation. I, for one, doubt whether there is sufficient political pressure to get this done at the first instance. On the Chinese side, they've taken the attitude of listening to what is said through diplomatic channels, choosing to ignore what's said in confirmation hearings and the like where there is presumably more posturing. What is unmistakable, though, is that Obama & Co. are not beyond taking a more aggressive attitude towards China, while the latter's patience is wearing thin.

Unless things calm down on either side, goodwill shall start wearing down. Eventually, we may get to considering Emmanuel-esque scenarios: Either the US brands China a currency manipulator--thus setting the stage for Section 301 legislation--or the Chinese sell off some of their stash of Treasuries to warn the US of its foolish intentions. Some commentators think China is more at risk in the event of a trade war; I think China has more room to stimulate demand at home at a time when exports are going downhill anyway. The PRC has simply more options. In any event, we draw closer to the endgame, if only by millimeters, not even decimiters...

China will make clear its displeasure at U.S. accusations of currency manipulation but hold its anger in check in the belief that President Barack Obama is simply posturing, Chinese analysts said on Friday.

Timothy Geithner, Obama's choice to head the U.S. Treasury, said the president believes China is "manipulating" the yuan, a loaded term that the Bush administration had deliberately avoided even as it criticised Beijing's exchange rate policy. The People's Bank of China, the central bank, had noted the comments by Geithner, a central bank official told Reuters on Friday. "We have reported them to relevant government departments and are awaiting a response," the official said, declining to elaborate.

Under U.S. law, formally labelling China a currency manipulator would require the Treasury to begin "expedited" negotiations with Beijing to reduce China's huge trade surplus with the United States and eliminate any "unfair" currency advantage. "China is going to be extremely unhappy, to say the least," Tao Xie, an expert on Sino-U.S. relations at the Beijing Foreign Studies University. "For administration officials, I do not think any one has ever pointed a finger so strongly at China."

Chinese anger at Geithner's choice of words, written in response to questions at his Senate nomination hearing, will add to simmering tensions over the global financial crisis. "President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner wrote.

Chinese officials have accused the United States of regulatory failings that sparked the meltdown. When Henry Paulson, former U.S. Treasury chief, said that the high Chinese savings rate had helped sow the seeds of the crisis, a firestorm of criticism ensued in China. U.S. Treasury bond prices fell on worries that China might respond to Geithner's frank comments by cutting its holdings, the world's largest, of U.S. government debt.

But Yi Xianrong, a finance professor at the Chinese Academy of Social Sciences, said such concerns were premature. "They will not take the remarks very seriously," Yi said, referring to the foreign ministry and central bank. We will only try to understand their real stance via diplomatic channels," he added. "If they really resort to diplomatic tactics to intervene, we will take measures to respond."

Geithner, head of the Federal Reserve Bank of New York, said the Obama administration would "aggressively" use all its diplomatic tools to press Beijing on currency reform, but he also signalled some flexibility and patience. "The question is how and when to broach the subject in order to do more good than harm," Geithner said.

That hedging could suggest a more moderate approach. The first real test will come in a semi-annual Treasury Department report, due in April, on whether other countries manipulate their foreign exchange regimes.

"Obama will be too busy in his first 100 days to take on China," Xie said. "If he really wants to induce China to do something, he should do it in private, not in a public confrontational way." The yuan edged down against the dollar on Friday after traders concluded that China might usher in a period of mild depreciation as a shot across Washington's bow. "Such U.S. comments, if they become an official policy, will only lead to tit-for-tat moves from the Chinese side," said a dealer at a major European bank in Shanghai.

A Reuters poll earlier this month forecast that the yuan would remain virtually fixed in place this year at 6.83 to the dollar as China walks a tightrope between slowing growth at home and fears about a backlash abroad if it pushed through a significant depreciation. The yuan has been stable against the dollar for six months but broader strength in the U.S. currency has put upward pressure on China's trade-weighted exchange rate, Capital Economics, a London consultancy, noted in a report.

Chinese exports have fallen for two straight months, which, coupled with a domestic property slump, dragged down the economy's growth to a seven-year low of 9.0 percent last year.