US-China clash over yuan escalates, risking superpower stand-off
US Treasury Secretary Tim Geithner has issued his harshest attack to date on China’s currency policy, the latest move in an escalating superpower clash across the gamut of commercial and strategic relations.
By Ambrose Evans-Pritchard
16 Sep 2010
“We are very concerned about the negative impact of (China’s) policies on our economic interests,” he told a Congressional hearing on Beijing’s use of exchange intervention for trade advantage.
“The pace of appreciation has been to slow. The undervalued renminbi helps China’s export sector. It encourages out-sourcing of production and jobs from the United States. By continuing a rigid exchange rate, China is impeding the adjustments needed to secure sustainable global growth,” he said.
The tough talk comes amid concerns that the global currency order is unravelling, with countries breaking ranks in a `beggar-thy-neigbour’ use of 1930s-style devaluation to help exporters and shore up their economies.
Japan became the latest country to intervene this week, carrying out massive dollar and euro purchases to weaken the yen. Sander Levin, chair of the US House Ways and Means Committee, called the move “deeply disturbing”, chiefly because it muddies the political water and lets China off the hook.
Mr Geithner’s ire follows a move by US trade chief Ron Kirk to file two cases against China at the World Trade Organization, alleging bias against US steel producers and credit card companies. Mr Kirk said he was “fighting for the American jobs threatened by China’s actions.”
Trade expert Gary Hufbauer from Washington’s Peterson Institute said the tensions risk triggering a dangerous clash.” The US and China are now adversaries, not enemies, but if the Obama administration pushes this trade agenda the way it is now doing, we will end up antagonists,” he said.
Professor Hufbauer said the White House has lost faith in “quiet diplomacy”, irked that the yuan has hardly moved since Beijing ended the dollar peg in June. This is spiced by populist fever before the mid-term elections in November.
“The US trade deficit with China is widening, yet the Chinese are still accumulating reserves at remarkable rate, beyond their needs. They know that growth in China’s coastal provinces is their passport to political stability, but this is incompatible with US political stability,” he said.
“We have grievances piling up in tyres, aluminium, paper, and steel, and it has all come to a head. Of course, China is getting an unfair share of the blame from this anti-globalisation mood on Capitol Hill. The truth is that when the US curbed imports of Chinese tyres, sales went to Brazil and Mexico instead, not to US producers,” he said.
Jiang Yu from China’s foreign ministry echoed the point. “Appreciation of the renminbi will not resolve the deficit between the US and China and will not resolve US domestic unemployment. Pressure will not only fail to solve the problems; it could have the opposite effect,” she said..
Views are clearly hardening on both sides. Over 140 members of Congress have so far backed the Ryan-Murphy bill enforcing sanctions against China for currency abuse, siding with US domestic industry and trade unions against US multinationals with plant in China.
There are few saints in this global currency game. Sterling has dropped by 20pc since the credit crisis, a side-effect of low interest rates. The US Federal Reserve has been “steering” the dollar lower. But the Anglo-Saxon duo they at least have trade deficits.
It is very different when surplus states such as China intervene to prevent trade adjustment. They are in effect exporting surplus capacity, and starving the world of demand. This is a recipe for global slumps.
Japan’s leaders say privately that China’s actions have begun to threaten their country’s industrial base, forcing Tokyo to respond with its own solo intervention or stand by as its exporters are asphyxiated and its economy tips into a deflationary spiral.
The twist is that Japan itself has a large trade surplus — though for different reasons — so it is in effect passing the unwanted parcel to the US and Europe rather than allowing the global system to come back into equilibrium.
If Britain and the US launch decide to a launch fresh blast of monetary stimulus, they in turn may succeed in passing the parcel back again. Economists say this is not a healthy way to run a global currency system.