Mr Geithner comes to China
US Treasury Secretary Timothy Geithner makes his first trip to China as a member of the administration next week. I have a column on the subject on the WSJ China webpage, the main points I make are:
On the key issues of the exchange rate and the trade deficit the Obama administration has moved away from the hardline rhetoric of the campaign trail.
The financial crisis has changed the terms of the debate: shrinking US demand will naturally erode the trade deficit and the main determinate of the exchange rate going forward will not be Chinese ‘manipulation’ but the impact of the Federal Reserve’s massive quantitative easing.
One interesting question going forward is how the debate will be structured. The Bush administration had the Strategic Economic Dialogue, with Hank Paulson and Wang Qishan in the lead. The Obama administration will have the Strategic & Economic Dialogue - with the first round pencilled in for Washington this summer.
They key difference is that ’strategic’ and ‘economic’ have been separated out. Hilary Clinton and State Councilor Dai Bingguo will lead on strategic issues. Geithner and Wang on economic issues. The benefit is bringing another big hitter to the dialogue. The potential cost is that by separating out issues it may be more difficult to find compromises which require trading across environment, economic, and security dossiers.
Whether the new format is a case of ‘many hands make light work’ or ‘too many cooks spoil the broth’ remains to be seen.
You can read the comlete article in Chinese here: http://chinese.wsj.com/gb/20090526/col082301.asp?source=UpFeature
“the main determinate of the exchange rate going forward will not be Chinese ‘manipulation’ but the impact of the Federal Reserve’s massive quantitative easing.”
Why is that? China can still manipulate its currency so that it depreciates in tandem with the dollar. If China continues pegging the yuan to the dollar, what difference does it make in our China trade deficit if the dollar devalues? Chinese goods will remain just as cheap in terms of US dollars.
Thanks for your comment. In response I would say that if the US$ starts to depreciate against the EUR and the JPY it would be politically difficult for the RMB to follow it down, as this would also mean depreciation against these other currencies.