Geithner Refrains From Labeling China a Manipulator
U.S. Treasury Secretary Timothy Geithner refrained from labeling China a manipulator of the yuan’s exchange rate, backtracking from an assertion he made during his confirmation hearings in January.
In its first semiannual report on foreign-exchange policies since Geithner became secretary, the Treasury said yesterday that while the yuan remains “undervalued,” no country “met the standards” for illegal currency manipulation in the second half of 2008.
The conclusion clashes with Geithner’s January 22 statement to a Senate panel that President Barack Obama “believes that China is manipulating its currency.” The shift may anger U.S. lawmakers, companies and trade unions who have sought measures to punish nations perceived to have undervalued exchange rates.
“Clearly the Treasury has made more of a political decision than an economic decision here,” Republican Senator Lindsey Graham of South Carolina said in a Bloomberg Television interview. “The truth is the Chinese manipulate their currency.”
Senate Action
Graham was a co-sponsor of a 2007 measure that would have allowed U.S. companies to ask for steeper tariffs against goods coming from countries found to have misaligned currencies. Democratic Senator Charles Schumer of New York, another sponsor of that bill, said he would reintroduce it.
“We are relying on the administration, as market conditions clear up, to keep China’s feet to the fire on this issue,” Schumer said in a statement. “To continue the effort on this front, we intend to reintroduce our legislation.”
The U.S. Business and Industry Council, which represents domestic manufacturing companies, said the decision not to label China as a currency manipulator “breaks a major commitment candidate Obama made last year to fight Chinese exchange-rate protectionism.”
In its report, the Treasury said it “did not find that any major trading partner had manipulated its exchange rate for the purposes of preventing effective balance-of-payments adjustment or to gain unfair competitive advantage.”
Yuan Stagnates
China limits the yuan’s gains by purchasing dollars, much of which are invested in U.S. Treasuries. From July 1 to the end of last year, the yuan rose just 0.4 percent. Its value has been little changed since the beginning of the year, closing yesterday at 6.8325 to the dollar.
Nicholas Lardy, an economist specializing in China at the Peterson Institute for International Economics in Washington, said that while China’s approach to financial management is “much more credible today” than it was during the Bush administration, “you’d have to be brain dead to say that this is a market-determined rate.”
By law, the Treasury has to enter direct talks with a country deemed to be manipulating its currency, and also seek redress through the International Monetary Fund. The department said yesterday it would “use every opportunity” to engage the Chinese “to permit greater flexibility” in the yuan, also known as the renminbi.
The White House was consulted on the report, a Treasury official told reporters in Washington on condition of anonymity. The official also said that the administration isn’t satisfied with what the person termed the slight movement versus the dollar in recent months no fax quick cash.
‘Appropriate Response’
Wang Baodong, a spokesman for the Chinese embassy in Washington, said his government will give an “appropriate response” to the Treasury report.
Geithner’s January remarks suggested a change in policy from the Bush administration, which had stopped short of using the term in criticizing China’s exchange-rate management. No country has been branded a manipulator since China in 1994.
At the time, People’s Bank of China Vice Governor Su Ning called Geithner’s allegations “untrue and misleading,” and China’s Commerce ministry suggested accusations of government tampering in foreign exchange would fuel U.S. protectionism.
Since then, Geithner has worked to repair relations with China, the U.S.’s second-largest trading partner. In February, Geithner told Bloomberg that the Treasury was still weighing how to evaluate China in the formal currency report.
Group of Seven
“We haven’t made that judgment yet,” he said in a Feb. 10 interview with Bloomberg Television. “We’re going to make that judgment carefully, looking not just at what’s happening in China and the management of their exchange rate regime, but at what’s happening globally at that time.”
That month he also pushed finance ministers and central bankers from the Group of Seven industrial nations to soften criticism of China’s economic policies, according to a person briefed on the matter.
In yesterday’s report, released in Washington, Geithner said China “has taken steps to enhance exchange-rate stability,” and that “officials acknowledged in January the need for greater flexibility and the need to allow the exchange rate to adapt to an equilibrium level.”
The Financial Services Forum, which represents 17 major commercial banks, securities firms, and insurance companies, called Geithner’s change of heart a “prudent call.”
“The most effective way to achieve the goal of a flexible, market-based exchange rate in China is to maintain an engagement posture and open dialogue,” said Rob Nichols, the Forum’s president and a former Bush Treasury spokesman.
While China has enacted a large fiscal stimulus, which should help spur domestic demand, strengthening the currency, the Treasury said its low level of debt means it has “headroom to undertake further fiscal measures.”
Global Recession
The report noted that while the global recession has caused a record trade contraction and led a number of currencies to depreciate against the dollar, many emerging markets have used their foreign-exchange reserves to temper the effects. Demand for Treasuries has been “robust,” it also said.
The U.S. needs China to sustain its purchases to fund billions of dollars worth of programs aimed at reviving the economy, about 70 percent of which reflects consumer spending. China’s holdings of Treasuries rose 0.6 percent to $744.2 billion in February, U.S. Treasury figures showed yesterday.