U.S. ramps up China currency fight
Thursday, October 7, 2010
The Obama administration is trying to escalate international pressure on China to change how it manages its currency, casting a global focus on what U.S. officials say has become a major risk to the economic recovery.
Calling the currency issue the "central existential challenge" facing the world economy, Treasury Secretary Timothy F. Geithner acknowledged that the administration's effort to settle the one-on-one spat through quiet diplomacy had failed, marking a new phase in the struggle with Chinese officials.
China's policy of keeping the yuan cheap on world markets "sets off a dangerous dynamic" that encourages other countries to follow suit and risks touching off a destructive, tit-for-tat competition for jobs and trade, Geithner said in remarks at the Brookings Institution.
"It's unfair to countries that were already running more flexible regimes and let their currencies appreciate," he said.
In seeking to muster a broader coalition, Geithner issued an ultimatum to the International Monetary Fund: Take a more aggressive stand on China's currency or potentially lose U.S. backing for a series of efforts pending at the agency.
The IMF is debating changes in how it is governed to give greater influence to developing nations in Asia and elsewhere, but Geithner said the steps should be tied to those countries, in particular China, allowing their currencies to more closely adhere to free-market levels.
"That's the deal on the table," Geithner said in his comments, delivered on the eve of the IMF's annual meeting.
His remarks come as concerns grow that China's currency management may prompt other countries to keep their currencies cheap so their exports remain relatively affordable. The Brazilian finance minister, for one, warned last month of a developing "currency war."
Capital has been pouring into emerging markets such as Brazil, India and China, and analysts talk in terms of a strategic shift in world investment patterns. These analysts say money is moving away from the slower-growing developed countries and toward emerging markets that are producing better returns and have increasingly sound economic institutions and governments. It is a change some regard as a defining shift in the global economy.
It is also putting pressure on some of those local currencies to increase in value as foreign investors boost the demand for local cash.
In many cases, local authorities have let the currencies respond. The Brazilian real has jumped more than 39 percent against the dollar since the start of 2009.
While other countries, including U.S. allies such as South Korea and Taiwan, have been "leaning against" a rise in their currencies, the most glaring exception is China. Chinese authorities pledged in June to pursue a more flexible exchange rate policy but since then have allowed the renminbi, also known as the yuan, to rise only about 2 percent against the dollar - compared with the 25 percent or 40 percent increase some analysts say is needed to reach market value.
No one, including Geithner, advocates a quick, dramatic rise in the renminbi of a sort that would disrupt China's important manufacturing sector. But pressure for some significant change seems to be growing.
As Chinese Premier Wen Jiabao toured Europe this week, officials there called for "orderly and broad-based appreciation" of the renminbi - prompting Chinese officials to retort that Europe should not "join the chorus." And Dominique Strauss-Kahn, the IMF's managing director, said in an interview with the Financial Times that he regarded the possibility of a competitive currency battle as serious. A recent move by Japan to stem an increase in the value of the yen was interpreted by some as an effort to lay bare the risk if China does not change course.
The issue is sensitive in Chinese domestic politics, with a powerful clique of export companies arguing that their continued success - and a vast number of jobs - depends on a cheap currency. It is also politically potent in the United States, where Chinese imports are blamed for the loss of U.S. jobs and Congress has moved to act on its own out of frustration with the lack of progress on currency and other issues.
But Geithner said the issue is also central to the agreement that leading economic nations struck during the crisis - to "rebalance" world economic patterns so major debtor nations such as the United States would reduce their spending and borrowing and major exporting nations would rely less on sales to the rest of the world and more on their domestic markets.
Flexible exchange rates are considered an important part of the process: An appreciation in the value of the renminbi, for example, would not only curb Chinese exports but give Chinese consumers more purchasing power and boost their demand for imported goods.
Despite the joint promises, however, the pace of change has been slow, and Geithner said the lack of progress could fracture the sense of international cooperation that took hold during the worst of the financial crisis.
The United States has been pushing the IMF to take a more public stance on China's currency policy, frustrated at the relative silence from an agency that treads a fine line among its members - in this case two of its most powerful ones. The United States is the IMF's biggest shareholder and makes the largest contribution to its budget, but China has been courted by the IMF as an emerging power and is in line to receive increased voting authority under proposed changes.
The fund has talked often about the need for undervalued currencies to rise but largely refrains from singling out China in its more general reports.
Geithner said he wanted the agency to exert more "leverage" over the currency issue, something the IMF was explicitly formed to cope with under the system of fixed exchange rates that existed after World War II.
He did not provide details on how it might go about that, and the IMF had no comment on his remarks. Others familiar with the institution, however, said the fund could be given a more prominent role among the Group of 20 nations if it was allowed to call representatives into session, request information, and issue more publicly pointed reports about what it thinks different countries need to do.
"The IMF is not going to be able to tell them what to do," said Kemal Dervis, a Brookings vice president, but among the G-20 "there is more understanding that unless the IMF plays that role, the process is hard to manage."