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Geithner Expects China to ‘Continue to Move’ on Yuan

Treasury Secretary Timothy F. Geithner
U.S. Treasury Secretary Timothy F. Geithner. Photographer: Tomohiro Ohsumi/Bloomberg

U.S. Treasury Secretary Timothy F. Geithner expects China will allow the yuan to strengthen because officials there understand it’s in the interest both of domestic growth and global economic stability.

“They recognize it’s important to the world,” Geithner said in an interview on Oct. 23 with Bloomberg Television, after a meeting of finance ministers and central bankers in Gyeongju, South Korea. As China’s currency stance affects more countries, “China recognizes that, and I think we’re going to see them continue to move.”

Geithner made the comments a day before an unscheduled visit to China for talks with Vice Premier Wang Qishan to discuss relations between the world’s two largest economies. Under pressure from Congress to combat what Geithner says is an undervalued yuan, the Obama administration used this weekend’s meetings to secure an agreement among the Group of 20 officials to avoid weakening their currencies. They also vowed to increase efforts to reduce trade imbalances.

Chinese officials still have a “ways to go” on loosening the yuan’s ties to the dollar, the Treasury chief said.

“But I think they’re committed to do that, because they recognize it’s in their interest,” he said.

Bets on Yuan

Trading in non-deliverable forwards today showed traders stepped up bets on appreciation in China’s currency, with 12-month contracts rising 0.5 percent to 6.4405 per dollar as of 10:12 a.m. in Hong Kong. The contracts reflect expectations for a 3.4 percent gain in the coming year from the spot rate of 6.6570 in Shanghai.

The G-20 talks concluded with a pledge to examine guidelines for current-account surpluses and deficits, without specifying how nations would set those goals. In the interview, Geithner said he believed 4 percent of gross domestic product would become the “benchmark” for whether trade balances are misaligned.

Geithner and Wang “exchanged views on U.S.-China economic relations” in the run up to next month’s G-20 leaders’ summit in Seoul, the Treasury said in a statement yesterday.

G-20 officials agreed to strengthen the International Monetary Fund’s surveillance powers, saying the Washington-based lender should monitor budgets, financial regulation and foreign exchange policies.

‘Warning System’

The IMF’s role will be to provide “an early warning system” for problematic swings in trade flows, Geithner said.

“It will help provoke changes in policies to reduce the risks that those will be sustained,” said Geithner, who worked at the IMF from 2001 to 2003. “The IMF has to play cop.”

The current account is the broadest measure of trade because it includes investment and transfer income, and it would be hard to achieve any correction in one without a currency shifting. Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent of GDP, while Turkey and South Africa have deficits bigger than that, according to the IMF.

Bundesbank President Axel Weber, who also attended the Gyeongju talks, said Germany shouldn’t be blamed for having a current-account surplus. Other countries, including Brazil, Japan and South Korea, have taken steps to limit gains in their currency to boost exporters and protect against swings in foreign investment.

China’s Impact

Heading into the meetings in South Korea, Geithner warned that the world was encountering a “dangerous dynamic” fueled by China’s reluctance to let the yuan rise more than 2 percent since a June pledge to make its foreign exchange policy more flexible. As a result, countries with more flexible exchange rates are “under a lot of pressure” to maintain growth and stability, he said in the interview.

“That pressure is magnified because some countries are still limiting the appreciation of their currency. And that’s unfair,” Geithner said. “The capital is flowing to where the exchange rates are moving.”

The U.S., Europe and Japan should no longer dominate foreign-exchange policy negotiations, and developed nations need to maintain efforts to boost growth, Geithner said. Instead, talks should be held with a wider range of countries and take into account the circumstances that different commodity producers face, depending on the size of their economies.

Federal Reserve Chairman Ben S. Bernanke didn’t need to take a “defensive” position in the G-20 talks when explaining the central bank’s monetary policy approach, Geithner said, even though Germany criticized the Fed for adding to global imbalances with talk of asset purchases to increase liquidity.

Geithner said the Obama administration will continue its efforts to convince Congress to pass additional economic aid measures, while extending tax breaks for households earning less than $250,000 per year.

“If we can go extend those middle-class tax cuts, and add some well-designed, targeted incentives for business investment, that will help us dig out of this more quickly,” Geithner said. “I’m sure that it will happen.”

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