Geithner Says U.S. Is Considering Ways to Push China on Yuan

Geithner Calls Pace of Yuan Appreciation ‘Too Slow’
Timothy Geithner, U.S. treasury secretary. Photographer: Joshua Roberts/Bloomberg

Treasury Secretary Timothy F. Geithner said the U.S. isn’t satisfied with the pace of yuan gains and is considering ways to urge China to let the currency rise faster.

“The pace of appreciation has been too slow and the extent of appreciation too limited,” Geithner said in testimony prepared for a congressional hearing today. “We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”

Geithner’s comments, his strongest since he took office in January 2009, highlight growing frustration among American officials with policies they say put American companies at a competitive disadvantage. The U.S. yesterday filed a pair of complaints against its second-largest trading partner with the World Trade Organization, and lawmakers facing elections in November are introducing measures allowing companies to pursue sanctions against China for its currency stance.

“The Treasury secretary looks like he is turning up the volume on his request for action from Chinese monetary officials,” said Chris Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ Ltd. in New York. “Politics in Washington is playing a role as Congress is looking for progress ahead of the midterm elections.”

Yuan Outlook

The yuan headed for a sixth daily gain against the dollar today, trading at 6.7333 as of 11:18 a.m. in Shanghai, compared with the 6.83 peg authorities maintained from July 2008 to June 2010 to shield Chinese exporters from the global crisis. Non-deliverable forwards indicate China will limit its appreciation to 1.2 percent over the next 12 months.

Geithner renewed calls on countries with trade surpluses, such as Japan and Germany, to increase domestic demand and rely less on exports. While he didn’t refer to Japan’s decision to intervene in the currency market yesterday, the subject may come up today after House Ways and Means Committee Chairman Sander Levin called the move “deeply disturbing.”

The secretary is slated to testify twice today, before the Senate Banking Committee and Levin’s panel.

“Heavy intervention” keeps the yuan undervalued, even after China’s June decision to drop a peg to the dollar, according to the U.S. Treasury chief.

Geithner, 49, said the Obama administration would step up its efforts to urge the Chinese to loosen restrictions on the currency that make the nation’s exports cheaper in overseas markets.

Currency Report

“We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly,” he said. These include the Treasury’s semiannual foreign exchange report, due to Congress next month, Geithner said.

In June, the U.S. stopped short of branding China a currency manipulator in a report that was originally due in April. Such a designation could lead to sanctions against China.

China, which surpassed Japan as the world’s second-largest economy last quarter, ran up a $119 billion trade deficit with the U.S. in the first half of 2010, putting it on a course to exceed last year’s total of $227 billion. It is also the biggest foreign investor in U.S. Treasury securities, with holdings of $843.7 billion in June.

China on June 19 announced that it would allow greater flexibility in its exchange rate, which Geithner called a “very important step.” Since then, the currency, also known as the renminbi, has advanced 1 percent against the dollar, he said.

‘Right to Be Frustrated’

“The United States is right to be frustrated with the rate of appreciation and the way that the renminbi has not appreciated since June,” said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington and a former Geithner adviser.

China may be using its exchange rate to handle the aftermath of the global crisis in ways that could help the U.S., said Stephen Roach, chairman of Morgan Stanley Asia, in an e-mail. He said China is moving cautiously while doing its “fair share” of righting lopsided global trade and investment flows.

“In a fragile post-crisis era, there is nothing wrong with China relying on a currency anchor as a linchpin of financial stability,” Roach said. “As much as Washington politicians would want China to help the U.S. devalue its way back into economic prosperity, that approach is bound to fail in an era of huge budget deficits.”

Economic Rebalancing

Geithner said China’s currency stance has created a “major distortion” in the global economy that is having a “negative impact” on the U.S. He said appreciation of the yuan would help with economic rebalancing, while not erasing the U.S. trade deficit with China.

He called on China to adjust its exchange rate and make a slate of other structural reforms to policies on interest rates, energy prices and service-sector investment. Geithner pledged the U.S. would “aggressively” pursue trade remedies, such as yesterday’s WTO complaints on electronic payment services and steel exports.

Geithner also said the U.S. is committed to “restoring fiscal sustainability” and reining in its long-term budget deficits.

Japan’s Intervention

Paul Krugman, a Nobel-prize winning Princeton University economist, has said China’s currency practices helped push the yen to rise to this week’s 15-year high against the dollar, prompting Japan to intervene unilaterally to weaken its currency on Sept. 15 for the first time since 2004.

Truman said Japan might be able to avoid the need for such actions by joining the U.S. efforts to persuade the Chinese to allow the yuan to appreciate.

In a hearing yesterday, Representative Tim Ryan, an Ohio Democrat and co-sponsor of legislation letting companies seek duties on Chinese imports, said China is violating trade laws and the bill would give the U.S. tools to combat undervalued currencies.

“It’s now time for our country to have the guts to stand up and take a strong stand against China’s currency manipulation,” Ryan said in testimony to the House Ways and Means Committee.

China’s yuan on Sept. 15 rose to the highest level since 1993 against the dollar on speculation the central bank will allow faster appreciation as inflation accelerates and foreign pressure mounts. The People’s Bank of China fixed the yuan’s reference rate at a record high before the U.S. House Ways and Means Committee convened two days of hearings to discuss the Asian nation’s currency policy.

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