Let's Just Hope He's Serious

NEW YORK, New York -- Huzzah! Treasury Secretary-nominee Tim Geithner told a Senate committee today that he believed China was manipulating its currency, and a certain common sense that was hibernating during both the W. Bush and Clinton administrations seems to have opened an eye, however tentatively.

The yuan was estimated at 50% undervalued months ago, and it's depreciated since then. But why, we Americans who dread a debased dollar might ask, would China want to undervalue its currency? Well, it makes its goods artificially competitive, pushing out other producers'. Remember the last time you bought shoes, electronics, bags, pills, furniture, postcards, toothbrushes or for that matter long-lasting foods like garlic that were made/harvested in any place but China? Me neither. And a large part of the massive global imbalance in trade that leaves us unable to buy anything made anywhere but China even when we want to is due to the undervalued yuan/renminbi.

The Walter Duranty Report previously discussed the pivotal role that Beijing's trade and export policies played in bringing about the global downturn ("correction" might be the better term, given the utterly unsustainable course things had taken). And yet out of cowardice, paralysis before its awareness of the problematic dependency the US had developed on Chinese investment in Treasury notes, and a commitment to an ill-understood "free-trade" ideology, the Bush administration refused to call a spade a spade or lift even a finger to address the damage being done to the global economy by China's surpluses and trade policies. Ironically, then, Bush's pusillanimity did nothing but harm free trade -- both by perpetuating patently unfree trade and by doing long-term damage to trade by allowing structural problems to build.

Geithner's remarks will of course draw fire from the likes of Senate Republicans and WSJ editors who egged us into this ultimate Faustian bargain in the first place, and his timing is quite poor -- what the world does not need now is either the US or China to grow protectionist. But calling out China's protectionism is making the world less, not more, safe for protectionism at the end of the day. And the timing will never be good; China acts like a coddled, slightly autistic child that demands special treatment and bursts into a tantrum at the slightest perceived offense. Tim Geithner, here's hoping you're the man who finally says, "The gig's up."

P.S. Fact-checker: The NY Times article on Geithner's remarks includes this quote: “Things have changed quite a bit since Hank Paulson made an issue of this,” said Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”

Here's the truth behind this claim: China's surplus for December was indeed down 0.3% versus November, when the surplus was a record $40.09 billion. Versus the previous December, the surplus was up nearly 20%, and the total 2008 surplus was up about 15%. Exports are falling no quicker than imports, since the government is reinstating WTO-violating export rebates and subsidies and devaluing the yuan to make imports prohibitively expensive. As for "recession"? After 13% growth in 2007, China's Q408 growth was a "mere" 6.8%. Oh, poo. So yes, Mr. Yardeni, bringing this up (even if 10 years too late) does accomplish something -- and the first results are in: China Central Bank Attacks Paulson’s ‘Gangster Logic.' Well done.