U.S. officials hopeful China will make concessions on currency

By John Pomfret
Washington Post Staff Writer
Friday, February 5, 2010

Treasury Secretary Timothy F. Geithner said Thursday that he believed China would allow its currency to appreciate vis-à-vis the dollar -- a move President Obama contends is essential to the U.S. economy by making U.S. exports more competitive and lowering China's massive trade surplus.

"I think it's actually quite likely [China] will move. I think they recognize it's important to them, in their interest as well," Geithner told the Senate Budget Committee.

The issue of China's overvalued currency, known as the yuan or the renminbi, is another in a string of problems bedeviling U.S. ties with China. Last week, the Obama administration announced that it was selling $6.4 billion worth of weapons to Taiwan, and China blasted the decision. This week the administration reiterated the president's intention to meet the exiled Tibetan leader, the Dalai Lama, and China criticized the move. The United States and China don't agree on a strategy for coping with Iran's alleged nuclear weapons program. And they are at odds on the issue of Internet freedom, which was highlighted last month when Google said it was considering pulling out of the country because China continues to censor Internet searches.

But the currency issue is potentially the most nettlesome because it has to do with the American economy and jobs at a time when growth remains weak and unemployment is at 10 percent. In addition, during his State of the Union address, Obama vowed to double U.S. exports by 2014. Most economists agree that he probably won't reach that goal with a cheap yuan.

Behind the bluster

Geithner's statement came a day after Obama vowed to "get much tougher" on China over this issue "to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage."

Obama's statement marked a shift for the administration which has for the past year played down its concerns about China's currency. On Thursday in Beijing, a spokesman for the Ministry of Foreign Affairs said that China's currency was not overvalued and that Obama's "wrongful accusations and pressure will not help solve this issue."

Behind the bluster, U.S. officials and experts said they think the Chinese are moving on the issue. A team of U.S. officials was in Beijing last week, and the United States is pushing China to make the currency issue a central part of the two countries' Strategic and Economic Dialogue scheduled for this summer. U.S. officials have also told China that the United States would rather not designate China a "currency manipulator" in a Treasury Department report in April.

A senior Treasury official who spoke on the condition of anonymity because of the sensitivity of the issue said the global financial crisis has helped to convince Beijing that it needs to make its economy less reliant on exports and more reliant on domestic demand. Allowing the yuan to strengthen against the dollar would theoretically put more money in the pockets of the Chinese by making imports cheaper.

"You are always reading tea leaves when you're talking to the Chinese," said the senior Treasury official, "but we definitely get the sense that the one thing the crisis has done is catalyze a view in China that they need to speed up their efforts to promote home-grown growth."

Most economists agree that the yuan is generally undervalued by 25 to 40 percent against the dollar. The cheap yuan has allowed China to amass by far the largest trade surplus in the world and a war chest of more than $1.7 trillion of foreign exchange.

Uncertain impact

C. Fred Bergsten, the director of the Peterson Institute for International Economics, said he also thinks the Chinese are going to revalue.

"It's a big deal," he said. "The one remaining misalignment in the world is this huge undervaluation of China."

Bergsten said other currencies -- in Singapore, Hong Kong, Taiwan and Malaysia -- are linked to the yuan, so if China revalued, those countries would follow suit.

If they allowed their currencies to float or at least revalue them significantly, he said, the U.S. economy could see its exports jump, create 700,000 to 800,000 jobs, and watch its trade deficit drop by as much as $125 billion.

Bergsten said he thinks the Chinese will probably go for a quick revaluation of 5, 8 or even 10 percent sometime this year. Any slower move would prompt speculators to rush cash into China as they awaited further revaluations, risking a massive asset bubble in real estate or other sectors of China's economy.

Other economists aren't convinced that a Chinese revaluation of the yuan would help the U.S. economy. Derek Scissors, an economist with the Heritage Foundation, said China has so many other techniques -- such as lowering taxes, giving companies free land, adopting export subsidies -- to goose its exports that a revaluation wouldn't matter much. He cited the example of 2005-07 when China allowed the yuan to appreciate by 20 percent and still the U.S. trade deficit with China ballooned.

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