Geithner, Obama Put Pressure on China Over Currency

By Jason Simpkins
Managing Editor
Money Morning

Timothy Geithner, President Barack Obama's nominee for U.S. treasury secretary, told the Senate that he and the new administration are prepared to take a harder line in economic relations with China.

In written responses to questions posed by the Senate, Geithner accused China of "manipulating" its currency, a phrase former-Treasury Secretary Henry M. Paulson and the Bush administration carefully avoided.

"President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency," Geithner wrote.

During his stint in the Senate, President Obama co-sponsored the Fair Currency Act of 2007, which defined currency misalignment as an export subsidy, paving the way for the U.S. Department of Commerce to impose countervailing duties on Chinese goods.

"At least partially as a result of the administration's failure to address Chinese currency manipulation, the U.S. imported more than $232 billion in goods from China than we sold to it last year," Obama wrote in support of the bill.

The bill failed to garner Congressional approval, but according to Geithner, "Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."

Geithner also said the administration would push China on further economic stimulus.

"Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for U.S. exports) and delay recovery from the crisis," he said. "Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home."

China's economy expanded by just 6.8% in the 2008 fourth quarter, and 9% for the whole year. The world's third-largest economy expanded by 13% in 2007.

When it came to China, former Treasury Secretary Paulson utilized a much lighter touch, an approach that emphasized diplomacy with the hope that this non-confrontational approach would gradually induce that communist nation into accepting a more open economy.

When asked whether he would continue the U.S.-China Strategic Economic Dialogue initiated by his predecessor, Geithner acknowledged that while there are certain challenges posed by Chinese economic policy, there are also opportunities and benefits inherent to increased cooperation.

"If confirmed, I am committed to a deep engagement between our senior economic officials to address differences and effectively resolve problems on these topics," Geithner said.

Still, neither Geithner nor President Obama seem to be starting out on the right foot with Chinese policymakers.

Chinese officials "will be more than annoyed" with Geithner's comments Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington told Bloomberg News. "They don't like being singled out, and they don't like countries explicitly criticizing them for the way they run their economy."

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