Geithner Says China Needs to Let Market Drive Up Yuan

I don't really expect this to get many responses at the moment, but I do have a feeling that this point of contention will, over time, continue to mount and become and issue before November rolls around.

Not too long ago, I posted about the yuan appreciation in an article about China becoming the second largest economy, given that from what I read the appreciation of the yuan was part of the increase since the measurement they used converted it to US dollars (or I think I remember -- I do remember that the methodology used did bring it to the forefront of my thoughts, although there's always the possibility of me being in error!).

While no doubt at the time the yuan appreciation was not the only reason the Chinese economy sprang ahead, given the excellent growth rates we have seen and the general stall experienced by the Japanese (which has spawned their own currency manipulation discussion) I would not be surprised if it was part of the reason. My entire rambling post which killed yet another thread on CKA can be found . I do find it a little ironic that the US had to send Clinton over to smooth over ruffled feathers when a US official said the ever dreaded words of currency manipulation in regards to the US dollar, but now that the shoe is on the other foot, and now within a short period of time the issue has done a bit of a 180.

In any case, while I was generally positive of the beginnings set forward before I'm not as happy as I once was. While I do want to see flexibility in the yuan I do not want to wait a couple of decades for the yuan to appreciate to what many economists forecast it should be right now, and I do feel that the Chinese is hoping that this largely token sign of "flexibility" would get the US off their backs, even though the fixed yuan debate had been raging for years previous to their agreement to let it float with Obama. I remember this hitting some economic headlines way back in 2005 when congress demanded a change, and I have a feeling that it will be one of the things coming back for another round in congress in 2010 -- yes, the Chinese are letting their horribly depreciating currency appreciate a bit, but are they making an effort? Is it happening fast enough?

The Chinese economy is expected to manage over 10% in growth over the next year, and some "senior government economists" within the Chinese government have said that substantial (could not find further evidence of this, nor what they meant by this) damage could be caused to the Chinese economy to make it drop to 8.4% growth, which they state would be horrible for the Chinese economy. Hence, with midterms coming around in the States and the Prime Minister of China stating that further flexibility is not going to happen, this looks to be taking a sharp turn into the political arena for both the Chinese and the Americans, who are strongly dependent on each other when it comes to exports, imports, and the financing of American debt. The political tensions will likely rise, and with them, reporting media sources like Bloomberg, come rumours of potential protectionism to fight against what is, truthfully, a heavily depreciated currency, in the form of congress allowing various groups to form tariffs against Chinese imports in an attempt to even out the balance issues currently being faced between the two nations.

This comes in line with other groups reporting that although China is "working to liberalize" their economy, they still face problems entering into the investment and some money trading portions of the Chinese economy, which is why I was so interested in seeing what happened to the Chinese capital account in my last post. Although China has taken measures to move towards a capital economy, finding representatives of the Community Party amongst the top representatives in companies and advisors is not difficult, so there is still a good deal of protectionism present there, especially with internal moves when it comes to buying and selling yuan (something some folks I know from China had problems with when coming to Canada).

I do generally agree with Geithner on this, and feel that those government economists in China, who are going against what I believe is the predominant opinion amongst economists, are in the wrong -- the yuan should be appreciating faster than it is. While shocks can be expected, allowing what looks like a 1.25% increase in the yuan against the US dollar a year is ludicrous, especially when they are still experiencing double digit growth. Keep in mind that general consensus is that the yuan is undervalued by several dozen percent, from what I remember. Concerns about other countries having to pay for the Chinese to have this success is only going to grow in political parties, and we all know where economic issues go once they get into the politician's hands (if they can keep things straight, like knowing that you can't reduce unemployment and inflation at the same time). If the Chinese don't get a move on soon, I fear that they may be facing a frosty set of rhetoric from America and some other countries fairly soon.

In any case, as always, if I am incorrect, please feel free to correct me. Also, I can probably grab some related news articles which talk about what I mentioned in passing in greater detail, should anyone be interested.

China will say: "Bite me"