Business Times - 26 Jan 2009
Obama's Treasury man resorting to China bashing?
Geithner's 'currency manipulation' remarks raise fears that new US administration sees Beijing as global competitor
By LEON HADAR
IF, AS Samuel Johnson once said, 'patriotism is the last refuge of the scoundrel', then protectionism provides the last protection for the economic loser. And 'China bashing', on the other hand, seems to be the first sanctuary of the maker of policy or law in Washington searching for a scapegoat to blame for his or her nation's geoeconomic and geostrategic woes. In many traditional English mystery novels, we discover at the end of the story that the butler did it, while in the Washington tale of economic mess, the role of the butler is played by the Chinaman who emerges as the villain of first resort.
So it was not surprising that US President Barack Obama's choice of Treasury Secretary, financial wunderkind Timothy Geithner - appearing before the Senate Finance Committee last week to apologise for what he called 'careless mistakes' in failing to pay US$34,000 in taxes he owed until shortly before he was nominated and to explain how the Obama administration was planning to fix the ailing American economy - delivered a harsh warning to China, saying that President Obama believed that the Chinese were 'manipulating' their currency, using a term that Mr Obama's predecessor in office had intentionally avoided using to portray China's foreign exchange practices.
Until Mr Geithner's Senate confirmation hearings last Wednesday and Thursday, most Asia hands in Washington could not provide a coherent perspective on how President Obama was going to handle relations with Beijing. Now, after Mr Geithner's testimony, some of the experts might be concerned that the new administration was planning to confront China as a geoeconomic competitor, if not a major global economic rival.
President George W Bush, rejecting the notion promoted by President Bill Clinton that Washington wanted to establish a 'strategic partnership' with Beijing, called China a 'strategic competitor' during his first months in office.
But the strategic relationship between the two nations was strengthened in the aftermath of 9/11, while former Treasury secretary Henry Paulson refrained from accusing China of manipulating its currency, although he did press the Chinese to permit the yuan to rise against the US dollar.
'President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency,' Mr Geithner told the Senators, although he did not indicate whether the Treasury under his leadership would formally name China as an exchange rate manipulator, a move that could ignite a Sino-American trade war. 'The question is how and when to broach the subject in order to do more good than harm,' he said. In any case, when it comes to the Sino-American economic relationship, Mr Obama has decided to raise the ante on the issue of China's foreign exchange policies, which is clearly not a friendly gesture as he tries to introduce himself to the Chinese.
Ironically, the nomination of Mr Geithner - who headed the New York Federal Reserve Bank and has already been deeply involved in government efforts to prop up financial institutions and markets (and who has studied Chinese and travelled and even lived in Asia for a while) - was applauded by many in Washington and Wall Street who believe that the Obama administration needed to continue pursuing economic engagement with China as part of its strategy to revive the financial markets and contain the economic downturn,
But the Obama administration has yet to introduce its strategy to achieve these goals through what is expected to be a more than US$800 billion fiscal stimulus package coupled with a renewed effort to inject money into the financial markets by using the rest of the financial rescue package, the Troubled Assets Relief Program (TARP) of US$700 billion.
The Senate Finance Committee voted 18-to-5 to recommend that the Senate confirm Mr Geithner as Treasury Secretary. The vote is expected to take place today.
Some political and economic analysts suggest that the new tough approach by Mr Obama towards China reflects the rising protectionist sentiments among members of the new Democratic majority on Capitol Hill and their allies in the labour unions who have accused the Chinese of maintaining the low value of the yuan against the US dollar in order to make their products cheaper in the American market, which in turn has brought about the ballooning of the US trade deficit with China and the loss of American manufacturing jobs. These sentiments are also very popular among the general American public that, according to opinion polls, has shifted to a more anti-globalisation stance.
In fact, while serving in the Senate, Mr Obama had backed legislation crafted by leading Democratic and Republican lawmakers that threatened China with sanctions if it refused to change its exchange rate policies.
But in a way, it seems that the Obama administration will need to figure out a way to juggle its ambitious fiscal and monetary policies that could shoot the US federal deficit into the stratosphere with its commitments to reduce the US trade deficit while preventing the collapse in value of the US dollar.
Obama administration officials stress that they would have no other choice but to promote a strong US dollar as it continues to expand the US budget deficit. As former Federal Reserve chairman Paul Volcker (who is a top Obama economic adviser) pointed out during testimony in support of Mr Geithner's nomination last week, 'several trillions of dollars will be necessary' from taxpayers and from the Federal Reserve to resuscitate the US financial system.
'Obviously, commitments made of that magnitude raise very large questions,' Mr Volcker told the senators, since they produce 'risks of undermining confidence in the dollar and raising the fears of future inflation' and could encourage foreign investors, including the Chinese (who hold about US$700 billion in US Treasury securities) to sell their holdings of Treasury bonds - which in turn could drive down the value of the US dollar and lead to even more sell-offs.
But then, it is the Chinese and other foreign investors who will have to pay for the huge US federal spending through their continuing purchase of US Treasury securities. Under this scenario, these massive global financial accounts will be balanced if American consumers would continue buying cheap Chinese products - just as President Obama and his aides are calling on Americans to take steps to live within their means, including by starting to increase their savings.
In fact, it is American policy of monetary and fiscal spending that tends to put downward pressure on the value of the US dollar against other currencies and forces the US to be more dependent on the investment of the Chinese and other foreigners in the US Treasury that prevents the collapse of the US currency. Under such conditions, it makes very little sense for Washington to start an economic war with China.
Even if the Chinese allow the value of their currency to rise, it is unlikely that Chinese consumers would start buying cheaper American products; they would more likely spend their stronger yuan in the Chinese market.
Demonstrating the dilemma that the Obama administration faces if it decides to toughen its approach vis-ÃƒÂ -vis China, prices of Treasury securities fell after Mr Geithner's testimony as investors considered the possibility that China might be less inclined to buy US debt if it comes under American pressure to revalue its currency.
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