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Oh, relax, it's only January. That was one China expert's evaluation of the impact of U.S. Treasury Secretary-designate Timothy Geithner's comment that he believes China is "manipulating" its currency.
China's currency, the yuan, which China allows to trade in a tight band, and not float freely in the currency market, has long been been viewed by Congressional lawmakers, business executives, and analysts as a tactic by China to artificially depress the value of its goods, in order to increase exports sales. Critics argue China is creating an unnatural competitive advantage for its companies. The yuan closed Thursday at 6.8380 to the dollar.
China counters that it must keep its currency fixed to protect its young, immature industries and developing economy.
Taking it with a grain of salt
Further, while the Bush administration did not push the currency issue much with China, and Geithner's comments suggest otherwise, economist David H. Wang, a China expert, said China is likely to disregard Geithner's comments.
"China's leaders have developed an increasing sophistication regarding the American political system," Wang said. There is a phrase you hear a lot now in Beijing that translates roughly to 'Don't pay attention to any comments from America from November thru January.' And, for the most part, that's a good rule to follow."
China, he said, will chalk Geithner's comments up to "confirmation posturing." Geithner's candidacy for Treasury Secretary was approved by the Senate Finance Committee, 18-5, Thursday, Bloomberg News reported; the full Senate is expected to vote on Geithner's nomination early next week, where approval is likely.
Good reasons to not upset China
Still, while Geithner can curry favor with lawmakers, many of whom see business in their districts as vulnerable to a weak yuan, there are good reasons to not upset China. Make that 682 billion reasons: China presently holds about $682 billion in U.S. Treasuries, the most by any nation or entity outside the U.S.
Should China's appetite for U.S. debt ever decrease, and it decides to sell a portion of it, for, say Japanese or United Kingdom bonds, long-term interest rates in the United States would rise substantially. Wang doesn't see that happening any time soon.
"China knows the American confirmation process is filled with rhetoric, so they will ignore it," Wang said. "What will matter is what President Obama or Geithner say during their first official visit to China or vice-versa."
Forex / Economic Analysis: Giethner's comments about the yuan will increase his standing with key U.S. lawmakers. That said, the large U.S. debt held by China is one of the many hangovers from the previous administration. It's an American liability that the U.S. must eliminate by balancing its budget and paying down the national debt, as soon as the U.S. economy is on a sustainable growth track.
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