Obama Skeptical of Chinese Currency Value

Sources:
NY Times - Geithner Hints at Harder Line on China Trade
Wall Street Journal - Chinese Ministry Denies Geithner's Currency Claims
Forbes - China, New U.S. Administration Make Yuan First Row


President Obama's nominee for Treasury secretary, Timothy Geithner, made waves in the financial world on Thursday when he stated that Obama believes China is manipulating its currency. The charge of manipulation is significant both because the Bush administration studiously avoided making that claim during its time in office and because a U.S. law requires an investigation and possible trade sanctions if a country is found to be intentionally engaging in currency manipulation in order to gain a trade advantage.

The Chinese currency, the yuan, has steadily appreciated against the U.S. dollar by 16% in the past few years after China eased a previous strict band of currency fluctuation. However, with the Chinese economic growth rate slowing and exports dropping, the yuan's exchange rate with the dollar has leveled off. An undervalued and low currency value helps a country's exports because its goods are then cheaper for foreign purchasers.

Geithner's signal to the Chinese from Obama indicates that the new President may take a harder and more protectionist line toward trade, a philosophy that Obama had indicated on the campaign trail. At the very least, Obama may call more attention to other countries' potential unfair practices and violations of trade regulations. Such a move would be heavily supported by U.S. manufacturers and unions, many of whom allege that China's artificially low yuan value gives China a wrongful comparative advantage over U.S. manufacturers.

An official from China's Ministry of Commerce responded to Geithner on Saturday and denied all accusations of currency manipulation. U.S. officials must be careful of antagonizing their biggest trading partner, however, as China holds a vast reserve of U.S. Treasury bills and has therefore been financing the ballooning U.S. government debt.


Discussion:
1. How does the U.S. government control the dollar's exchange rate?
2. Do any U.S. domestic interests benefit from a devalued yuan?
3. Could Geithner's comments serve another purpose than antagonism, sparking a new starting point for dialogue with China?