By Brady Dennis
Washington Post Staff Writer
Wednesday, January 12, 2011; 11:11 PM
China's unwillingness to allow its currency to rise in value is hampering U.S. competitiveness in the global marketplace and harming the Chinese economy, Treasury Secretary Timothy F. Geithner said Wednesday, ahead of next week's highly anticipated visit by Chinese President Hu Jintao.
Beijing's currency policies remain the most contentious economic issue between China and Washington. By keeping the value of its currency low, China gives its exporters an advantage by making their goods cheaper on the international market.
The undervaluation of the renminbi, also known as the yuan, "is not a tenable policy for China or for the world economy," Geithner said in a morning speech at the Johns Hopkins School of Advanced International Studies.
Although China has allowed the yuan to appreciate slightly against the dollar over the past year, Geithner urged Chinese leaders to accelerate that process. Failure to do so could cause a jump in inflation for China and a damaging rise in asset prices, "both of which will threaten future growth," he said.
"We believe it is in China's interest to allow the currency to appreciate more rapidly in response to market forces. And we believe China will do so because the alternative will be too costly - both for China and for China's relations with the rest of the world."
In addition to more aggressively raising the value of their currency, the Chinese should take action to curb intellectual property theft, Geithner said.
"We are willing to make progress on these issues, but our ability to do so will depend, of course, on how much progress we see from China," he said.
Despite the firm words on China's currency policies, Geithner offered a largely diplomatic assessment of economic relations between the two countries. He mentioned the debate that is unfolding within China about the pace of economic reforms, and he said that despite American concerns over currency issues, China's explosive economy creates enormous opportunities for the United States.
The economic relationship between China and the United States offers "tremendous benefits" to both countries, he said, adding that "our economic strengths are largely complementary. . . . We have a great deal invested in each other's success."
President Obama and Hu will have plenty of topics to wrestle with next week, including military tension on the Korean Peninsula, human rights and international trade. But the economic divisions between the two nations will figure prominently on their agenda.
The currency issue prompted the U.S. House to pass a special tax last year to offset what congressional leaders deemed China's "currency manipulation," though the Senate did not take a similar vote.
Geithner said that Hu's state visit comes "at a time of important transition for the world economy," noting that while many major national economies are still reeling from the financial crisis, emerging ones such as China are in the early stages of "a long period of very rapid economic growth."
The United States, he said, lies at the crossroads of those divergent paths: Its economy is likely to grow at only half the rate of major emerging economies, but twice as rapidly as Japan's and Europe's.
"These growth dynamics will fundamentally change the balance in the world economy, forcing changes in the architecture of the trade and financial systems," Geithner said.
Although China will play a significant role in that changing architecture, and although its economic policies undoubtedly will affect the fortunes of the United States, Geithner said, America's economic fate ultimately rests largely in its own hands.
"The prosperity of Americans depends overwhelmingly on the economic policies we pursue to strengthen American competitiveness," he said. "We need to understand that our strength as a nation will depend not on choices made by China's leaders, but on choices we make here at home."
A key part of that challenge will be restoring fiscal responsibility, Geithner said, foreshadowing a policy debate that is certain to take center stage in Washington in coming months. He said the government must find ways to spend less, and in time must devise a simpler, more equitable tax system.
Geithner said those key challenges, as well as others such as investing in research and development, educational reforms, and public infrastructure, are fundamental to the country's success.
"They are not just an economic imperative, they are a national security imperative," Geithner said. "Our strength as a nation depends on the ability of our political system to move quickly enough to put in place solutions to our long-term problems."