BEIJING (Reuters) - China has just ushered in the Year of the Ox, which is typically associated in the lunar calendar with calm, fortitude and success through toil.
That’s just as well, for China and the United States will need great calm and fortitude if they are to repair through hard work the damage done by new U.S. Treasury Secretary Timothy Geithner’s accusation that Beijing manipulates its currency.
Now, it is patently true that the yuan’s exchange rate is controlled by the People’s Bank of China. How else did the central bank accumulate nearly $2 trillion in reserves? Was it by accident that the yuan rose 20 percent against the dollar over three years only to become rooted to the spot since last July?
Of course not. China, with extensive capital controls, actively “manages” its exchange rate.
But “manipulation” is a dirty word in currency diplomacy. If the Treasury were to determine in its next report to Congress in the spring that China manipulates the yuan, it would be obliged under U.S. law to launch negotiations with Beijing on the issue.
Given China’s abhorrence of outsiders’ poking their nose into its business, that would be sure to enrage China.
By all accounts from Washington, the inclusion of the word “manipulation” in Geithner’s written testimony to the Senate Finance Committee was due to sloppy staff work and poor inter-agency coordination within a young administration.
President Barack Obama acted quickly, first through his spokesman and later through a call to President Hu Jintao, to smooth ruffled feathers.
The Chinese-language Economic Observer said in a front-page commentary that only “extreme irrationality” would prevent China and the United States from continuing to work together.
“It’s not that the United States needs China or that China needs the United States, but that they both need each other.”
Still, the worry for a world in recession is that the Geithner flap shows the United States and China are still talking past each other, rather than to each other, on how to iron out the imbalances at the root of the global economic meltdown.
Premier Wen Jiabao told the Financial Times in an interview published late on Sunday that it was “ridiculous” to hold China responsible for the crisis.
Speaking a few days earlier at the World Economic Forum in Davos, Wen pinned the blame instead squarely on Washington.
“Inappropriate macroeconomic policies in some economies and their unsustainable model of development, characterized by prolonged low savings and high consumption,” was first in a list of reasons Wen cited for the crisis.
Few would dispute that U.S. excesses are part of the problem.
But now that America is abruptly tightening its belt, many say it is incumbent on China, as the leading surplus-savings country in Asia, to take up the resulting slack in global demand by doing much more than it has to stoke domestic consumption.
Michael Pettis, an economics professor at Peking University, said he was worried that China was resisting a further rise in the yuan -- which would spur homegrown demand and dampen exports -- because it feared losing competitiveness to neighbors with depreciating currencies such as South Korea and Vietnam.
“China, like the U.S. in the 1920s, is unable to understand that as a major power it does not have the luxury of acting like just any other small country,” Pettis said in a post on the economics website www.rgemonitor.com.
“It must take the lead in the adjustment among Asian exporters, and that almost certainly means that its exports and trade surpluses should fall faster than those of the other countries,” he added.
Axel Merk, a Palo Alto, California-based manager of currency mutual funds, said Geithner’s comments were an insult to China. Moreover, Washington was resorting to manipulation of its own, slashing interest rates and purchasing a vast array of debt securities with the aim of weakening the dollar without causing a disorderly rout.
But Merk said China cannot grow out of the global downturn with a cheap currency. And Beijing’s reluctance to encourage domestic entrepreneurship to bring about a more balanced economy was leading to more problems than it solves for China.
“China won’t be bullied by the U.S.; however, a little more diplomacy and a little less populism may be beneficial to both China and the global economy,” he said in a letter to investors.
So what is to be done?
Eswar Prasad, a professor of trade policy at Cornell University, proposes a grand bargain to avoid an escalation in Sino-American tension, something that he says the world economy, already on its knees, simply cannot afford.
First, both countries would pledge to do all they can to stimulate domestic demand, with China signaling it would not rely on exports to prop up jobs and growth.
Second, China would agree to make the yuan more responsive to market forces, while the United States would set out a plan to cut its huge budget deficit once the economy begins to recover.
Third, Washington would support a bigger role for Beijing in the International Monetary Fund and other global financial institutions, giving China the clout its economic stature merits.
“The political leadership on both sides has to step up to get beyond nationalistic sentiments and convince their people that, in this interconnected world, China and the U.S. will sink or swim together. There is a way. Is there the will?” Prasad, a former head of the IMF’s China division, said.
Additional reporting by Chris Buckley; Editing by Sonya Hepinstall
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