On Thursday, Treasury Secretary Tim Geithner threw a bone to U.S. manufacturers and economists long irritated by Chinese currency manipulation: he testified before a Senate committee that yes, in fact, to him Chinese currency does seem "significantly undervalued." The Senators themselves think Beijing monetary policy is hampering the U.S. recovery, keeping the trade imbalance heavily tilted toward China. So why is this declaration coming now, and what good will it do? The consensus is that this is more about domestic than foreign politics, and makes little sense if taken at face value.
These Hearings Are a 'Threat' That Congress Wants Action 24/7 Wall St.'s Douglas McIntyre explains that the hearings are a "threat to Geithner and the Administration that if they fail to take up the issues of lost jobs and the trade imbalance, then Congress will. And Congress could pass a series of laws that lay out rules for trade with China." Things could get quite messy, he notes:
The proponents of restriction of Chinese trade may not have thought their position all the way through. Where will the cheap goods that improve the margins of US retailers and keep prices down for consumers come from? Do American shoppers have the will to live with shortages and higher prices? ... China has not moved much more than an inch on the yuan issue, and it is the lack of what could be a very modest move beyond that which may cause the equivalent of an old-fashioned trade war.
- Weak Criticism Designed to Placate Americans "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited." That was part of Geithner's pre-released remarks. It's "about as far from publicly accusing China of currency manipulation as you can get," comments Business Insider's Henry Blodget, who also notes that "it has already provoked a reaction from China," whose spokesman with the Ministry of Commerce called criticisms of China's exchange rate policy "groundless." Blodget says this "jawboning" might encourage China to let the yuan rise "if Geithner leaves a way for China to save face by making it look like their idea," but ultimately agrees that this is a domestic political show: Geithner is "speaking to Americans who think that the reason the economy is in the tank is because China is a currency manipulator."
- 'In This Game of Chicken, He Really, Really Wants China to Blink,' writes Yves Smith of Geithner. She writes that "Team Obama" has been "remarkably passive in dealing with high unemployment," and that "midterm elections give them more cover with the Chinese (they can say, plausibly, that domestic politics demand some concrete steps from China)." But if Democrats start re-energizing, the Obama team may feel more comfortable, and "may settle for some face gestures from China in lieu of real action."
- Bludgeoning China with Words Doesn't Make Much Sense The Economist's Ryan Avent says that steady "persuasion" on China to ease off its currency "is working." He explains that "it was American pressure that led the Chinese to de-peg their currency in the first place." He thinks China is well aware of "the need to let its currency rise," and will let it happen in due course, "when economic conditions permit." But yuan appreciation isn't the silver bullet Americans think it is, either: "promises that revaluation will eliminate America's trade deficit and create hundreds of thousands of jobs are overselling what appreciation without structural reform can accomplish."
- Especially Since the Fed Could Solve This Itself "While it would be very nice if Geithner could wave a magic wand and make Chinese officials implement the policies we prefer, he doesn't actually have this power," observes Think Progress's Matt Yglesias. "By contrast, the Federal Reserve's Open Market Committee does in fact have the power to wave a magic wand and increase the worldwide supply of dollars," which would accomplish roughly the same thing, and "carries much less downside risk than a policy based on grandstanding and attempted coercion."