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China and the U.S. Ease Currency Tensions


Treasury Secretary Timothy Geithner is in China this week, and over the next several days he’ll be meeting with Chinese government officials on a host of matters concerning the two nations.  At the top of the agenda for these meetings will no doubt be the currency issue.  By all accounts, tensions over this issue have definitely eased in front of the Geithner visit.  Last Thursday evening there were reports that President Obama and Chinese President Hu Jintao spoke via telephone for over an hour while Air Force One sat on the tarmac at Andrews Air Force Base, and you can bet that this conversation included a preliminary addressing of the currency issue.

For months now, the U.S. has tried to put pressure on China to revalue its yuan and remove the currency from its current peg to U.S. dollar.  Some U.S. politicians want to tag China with the moniker of “currency manipulator,” which China doesn’t want.  More importantly, the Obama administration doesn’t want this either, as it could ignite a trade war that would be very unhealthy and counterproductive to both nations.

In a substantive move toward easing the tensions over this issue, last week Geithner said he would delay a report to Congress on the currency policies of major trading partners, including China.  Geithner said that several high-level meetings between China and the U.S played a key role in the decision to postpone any determination on condemning China as a currency manipulator. 

I think this decision is a sign that ultimately, the two nations know that coming to a reasonable resolution is in both their best interests. Moreover, the saber rattling that’s gone on in the past over issues like tariffs, trade and now the currency is more for domestic consumption than it is for any real problem solving.

In the U.S., the administration is under pressure to get tough on China from some members of Congress who accuse Beijing of purposefully undervaluing the yuan to gain an export advantage. In China, that nation’s leadership does not want to be perceived as kowtowing to the U.S., and so any heavy-handed branding of China as a currency manipulator will likely not achieve U.S. objectives. 

I suspect that the yuan will be revalued against the greenback sometime in the latter half of the year, but not according to the schedule pushed for by Washington lawmakers. The Chinese are too smart to be perceived as caving under U.S. pressure.  Of course, they also are smart enough to understand that it’s in their interest to have a lot of trade with the U.S., and so they will slowly allow their currency to appreciate—but on their own time table, and likely on terms good enough to appease citizens in both Washington and Beijing.

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