The Treasury Secretary is using IMF voting rights as leverage
Treasury Secretary Timothy Geithner is known for not picking fights he can't win and keeping his differences with other countries private. At the annual meeting of the International Monetary Fund on Oct. 8-9, he shifted course on both counts.
After months of publicly supporting China while privately pushing for a stronger yuan, Geithner used the gathering of finance ministers and central bankers to publicly prod China to move faster. He said China is engaged in a "dangerous dynamic" of keeping its currency undervalued and encouraging other nations to follow suit.
At the same time, Geithner turned a backroom battle over whether to give China and other developing economies greater IMF voting rights into a bargaining chip in the currency debate. If China wants the additional power that the voting rights would confer, he says, China must live up to its commitment to let its currency float more freely.
Geithner's maneuvering is in line with politics at home, where both parties' candidates in this year's midterm elections have slipped anti-China rhetoric into their advertising campaigns. The House on Sept. 29 passed a bill to allow U.S. companies to seek duties on Chinese products to compensate for a weak yuan. The Treasury Secretary is also channeling international ire over a potential currency war if China doesn't let the yuan appreciate. "There is a sense that everyone else is hiding behind the Americans" on this issue, says Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics.
Brazil, South Korea, and Thailand have been selling their currencies recently to prevent short-term investors from pushing the value up, harming exporters, and later fleeing in a rush, sending the currency plunging. Japan last month intervened for the first time since 2004 to limit the rise of the yen, which had been at its highest against the dollar in 15 years.
In blaming China and sticking his neck out, Geithner may be setting himself and President Barack Obama up for a fall at the Group of 20 meeting in Seoul on Nov. 11-12, where currencies are on the agenda. Meghnad Desai, professor emeritus of the London School of Economics and a member of Britain's House of Lords, is among economists who see the U.S. making China a scapegoat while ignoring a fundamental shift of economic power to Asia because of fiscal and economic woes in the West. "People still think that the problem with the U.S. is the Chinese exchange rate? Come on. Give me a break," Desai says. If Geithner comes up empty-handed, "the immediate failure will be probably most felt domestically," where confidence in the White House's economic strategy is waning, Kirkegaard says.
Economists such as Desai believe the U.S. needs to jawbone China less and focus more on curbing its long-term budget deficit while spending what's needed in the short term to spur growth. Exporters such as China and Japan, in turn, should encourage more domestic consumption and less saving, these economists say. Geithner agrees with Desai that countries with trade surpluses, such as Germany and China, should reduce their reliance on exports to the U.S. Premier Wen Jiabao said on Oct. 6 that China is addressing both the currency and trade issues—only it's moving gradually to avoid social upheaval. Since June the yuan has appreciated about 2 percent against the dollar.
Keeping the U.S. from meddling in China's domestic affairs may trump any international aspirations, investor George Soros said at an IMF panel on Oct. 9. China is most comfortable in bilateral relations or "what I call state capitalism as opposed to international capitalism," Soros said. "As long as China is the only one following that course, it actually derives very substantial benefits," he said. "But if everybody does it, it's the end of the multilateral system." As Geithner says, that's China's choice.
The bottom line: Treasury Secretary Geithner is turning up the rhetoric in his push to get China to allow the yuan to rise against the dollar.