Treasury Secretary Timothy F Geithner, by delaying a report on global currency policies, is betting international diplomacy will work better than US pressure to get China to strengthen the yuan.
In an April 3 statement, Geithner announced the delay of the report, scheduled for April 15, and urged China to move toward a more flexible currency. He said a series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy. The decision came days after Chinese President Hu Jintao announced plans to visit Washington for a nuclear summit April 12-13.
The Treasury chief faces demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead expressing confidence that China, where financial markets are shut today for a holiday, will take steps on its own in the next several months to strengthen its currency.
The move will give China space to relax currency controls “without looking like they’re kowtowing to US pressure,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
Gilmore said China may allow the yuan to appreciate in a “moderate” way within weeks. He said the options probably include widening the current peg’s trading band or returning to the July 2008 policy of a “crawling peg” that allowed for 5 per cent annual appreciation. The “least likely” alternative: revaluing the currency in a “step-like fashion,” Gilmore said.
In an April 2 interview with Bloomberg Television, Geithner said the US strategy is “designed to increase the odds that China does decide to do what’s in their interest, which is to let their currency start to move up again, and that’ll be part of making sure we have a more healthy global recovery in place.”
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In the US, lawmakers from both parties said administration officials are wrong to expect that negotiations will prompt such a move from China’s leaders. With the US unemployment rate hovering near a 26-year high, some lawmakers say China’s policies give its exporters an unfair advantage over their US competitors.
“We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E Schumer, a New York Democrat, said in an e-mailed statement two days ago. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”
Schumer, along with four other senators including South Carolina Republican Lindsey Graham, last month introduced legislation to require the Treasury to determine if a nation had a currency misaligned with the dollar and make it easier to respond by imposing import duties.
The Treasury’s delay “underscores the urgent need” for Congress to pass such legislation, said Alan Tonelson, research fellow with the US Business and Industry Council, a Washington-based organization representing about 2,000 manufacturing companies.
“There can be no question that attempts to negotiate an end to China’s currency manipulation have failed for eight years and it is long past time for unilateral US responses,” Tonelson said in an interview.
Schumer, a member of the Senate Finance and Banking committees, said in his statement he intended to push forward with his legislation.
Still, Yu Yongding, a former adviser to the People’s Bank of China, welcomed Geithner’s decision as “of course good news,” adding that confrontation is “meaningless.”
“Problems between China and the US can be solved through negotiations,” Yu said in a telephone interview from India yesterday. “If you want to hurt the other side, then you’ll hurt yourself.”
Last month, Chinese executives, in interviews with Bloomberg News, joined in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.
Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd, said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co, said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co, said a stronger currency would cut import costs.
“There is pressure within China for a yuan revaluation, and as long as exports continue to rebound, there is a good chance that it will happen,” said Elizabeth Economy, director of Asia studies at the Council on Foreign Relations in New York.
Last week, yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace.
While a stronger yuan will help cut costs in imported fertilizers and pesticides, some agricultural sectors may face a “collapse” if exchange-rate pressures climb, the China Chamber of Commerce of Import and Export of Foodstuffs, Native Produce & Animal By-Products, said in an April 2 report on its Web site.
Twelve-month non-deliverable forwards were little changed at 6.6485 per dollar as of 9:01 am in Tokyo, reflecting bets the currency will strengthen 2.7 per cent from the April 2 spot rate of 6.8256, according to data compiled by Bloomberg. China’s financial markets are closed today for a national holiday.
China’s foreign-exchange policy has contributed to a rise in the country’s reserves to $2.4 trillion, the world’s largest. That, in turn, has enabled China to become the largest foreign holder of US Treasuries, with a total of $889 billion in January.
The Treasury hasn’t labeled any country a currency manipulator since 1994, and the department’s biannual report has been delayed in the past under both Democratic and Republican administrations.
The latest delay “is probably the politically smart thing to do,” with Hu planning to be in Washington for talks with President Barack Obama, said Charles Freeman, a China expert at the Center for Strategic and International Studies in Washington.
“I’m not sure Treasury really knows what it wants to do yet,” Freeman said. “It’s testing the political waters on Capitol Hill.”