Wednesday, April 07, 2010

Obama's juggling act on China's currency

Business Times - 08 Apr 2010

Obama's juggling act on China's currency


THE decision by the Obama Administration to delay issuing a report that might have identified China as a 'currency manipulator' was a smart move. It stems from both geo-strategic considerations - the need to co-opt the Chinese into a united international coalition in dealing with Iran's nuclear programme - as well as from the recognition that behind-the-scenes bilateral negotiations between the American and the Chinese, including a series of trade-related meetings scheduled through May and June, could bring about some progress on China's currency. A tough American stand would only ignite a costly Sino-American diplomatic and economic crisis.

US Treasury Secretary Timothy Geithner made the decision over the weekend, explaining that he was going to wait a while before he announced whether or not he thought China was officially manipulating its currency.

China's critics in Washington, led by several Democratic and Republican lawmakers, including Senator Charles Schumer, a Democrat from New York, and Senator Lindsey Graham, a Republican from South Carolina, have accused China of manipulating its currency to make Chinese exports cheaper. They have jointly introduced legislation to punish China over the issue.

The White House had come under intense political pressure to issue a report on the exchange rate to Congress on April 15. Most observers expected the report to accuse China of currency manipulation.

But then after China's President Hu Jintao agreed to attend a major security summit on April 12 in Washington, the US President and his aides decided that having China's help in limiting nuclear proliferation, especially when it comes to Iran's suspected nuclear military programmes, was more important to US interests than the need to respond to the political pressure.

Congress and interest groups allied with the Democratic Party, such as the trade unions, have blamed the wide US trade deficit with China on Beijing's currency exchange policies, accusing it of trade protectionism that resulted in the loss of American jobs.

Notwithstanding this political pressure, many economists, including some in the Obama Administration, share the view that by maintaining inflexible exchange rates through currency intervention and pursuing a strategy of boosting its export-oriented economy, China is preventing the Americans and other exporting nations from competing on a level playing field in China.

And while refraining from accusing China of currency manipulation and trade protectionism and creating the conditions for a new series of trade wars between the two countries, Mr Geithner and other officials insist that a move by China to a more 'market-oriented' exchange rate will help accelerate the process of 'global re-balancing' - strengthen domestic demand in surplus economies (China) and boost savings in deficit economies (the US).

A stronger yuan will thus benefit not only the US but other deficit economies interested in expanding their exports, and should be seen as part of needed Chinese steps to boost domestic demand.

But the same officials also understand that applying an aggressive US stance on the issue will probably backfire and make it even less likely that China will revalue its currency and could hurt US efforts to engage China on Iran, North Korea, climate change and on other global strategic policy areas. In any case, the fact that the Chinese recycle their trade surplus into America's bond market and as a result are now in possession of huge amounts of US Treasury holdings means that Washington is also constrained in its ability to put pressure on the Chinese.

The hope in Washington is that the two countries will continue talking for about three months and that China will announce a decision to revalue the yuan, preferably before the mid-term Congressional election in the US.

Meanwhile, there is a hope among Obama Administration officials that the Chinese will be willing to join the US and other permanent members of the United Nations Security Council, including Russia, in mounting a diplomatic campaign to force the Iranians to end their uranium enrichment programme.

But then if the Chinese refrain from taking steps to revalue their currency before the mid-term elections in November, Mr Obama could find himself under attack from many Democrats and the trade unions for failing to stand up to China and protect American jobs. And if the Chinese also reject Washington's call to join the international coalition on Iran, Mr Obama will probably face criticism from the Republicans for his alleged 'appeasement' of China and will be under growing pressure to use military power against Iran.

In today's globalised world, everything seems to have a knock-on effect on everything else.

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