Geithner Delays Currency Report, Urges Flexible Yuan

Geithner Delays Currency Report, Urges Flexible Yuan (Update1)

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By Greg Stohr and Phil Mattingly

April 4 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan.

Geithner in a statement yesterday urged China to move toward a more flexible currency and said a series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy. The delay comes as Chinese President Hu Jintao is scheduled to visit Washington for a nuclear summit April 12-13.

The Treasury chief faces demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead betting that China will take steps on its own in the next several months to strengthen its currency, analysts said.

“There is pressure within China for a yuan revaluation and, as long as exports continue to rebound, there is a good chance that it will happen,” said Elizabeth Economy, director of Asia studies at the Council on Foreign Relations in New York. “If, however, there is a lot of public pressure emanating from the U.S., that will likely give support to those in the Chinese government who do not want to see a revaluation.”

Lawmakers Critical

Geithner’s statement said countries such as China “with inflexible exchange rates” can promote global growth by “combining policy efforts to strengthen domestic demand with greater exchange-rate flexibility.”

“A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing,” he said.

Lawmakers from both parties said Geithner is wrong to expect that negotiations will prompt such a move from China’s leaders. With the U.S. unemployment rate hovering near a 26-year high, some lawmakers say China’s policies give its exporters an unfair advantage over their U.S. competitors.

“We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E. Schumer, a New York Democrat, said in an e-mailed statement yesterday. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”

Legislation

Schumer, along with four other senators including South Carolina Republican Lindsey Graham, last month introduced legislation to require the Treasury to determine if a nation had a currency misaligned with the dollar and make it easier to respond by imposing import duties.

The Treasury’s delay “underscores the urgent need” for Congress to pass such legislation, said Alan Tonelson, research fellow with the U.S. Business and Industry Council, a Washington-based organization representing about 2,000 manufacturing companies.

“There can be no question that attempts to negotiate an end to China’s currency manipulation have failed for eight years and it is long past time for unilateral U.S. responses,” Tonelson said in an interview yesterday.

Schumer, a member of the Senate Finance and Banking committees, said in his statement he intended to push forward with his legislation.

Denial

Still, Yu Yongding, a former adviser to the People’s Bank of China, welcomed Geithner’s decision as “of course good news,” adding that confrontation is “meaningless.”

“Problems between China and the U.S. can be solved through negotiations,” Yu said in a telephone interview from India today. “If you want to hurt the other side, then you’ll hurt yourself.”

“The past few years have proven that denying the problem doesn’t solve anything,” Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, said in an e- mailed statement. “The Treasury Department should cite China as a currency manipulator.”

Representative Sander Levin of Michigan, the Democratic chairman of the House Ways and Means Committee, was more supportive.

Stronger Yuan

The delay “is for a definite period and for a defined purpose,” Levin said. “If the multilateral effort does not result in China’s making significant changes, the administration and Congress will have no choice but to take appropriate action.”

Geithner, in an April 2 interview on Bloomberg Television, expressed confidence that China will decide a stronger yuan is in the country’s interest, saying the U.S. is trying to “maximize the chance that they move quickly” to let the yuan appreciate.

Last month, Chinese executives, in interviews with Bloomberg News, joined in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.

Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

Yuan Forwards

Yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Twelve-month non-deliverable forwards advanced 0.2 percent to 6.6491 per dollar as of 5:30 p.m. April 2 in Hong Kong, reflecting bets the currency will strengthen 2.7 percent from the spot rate of 6.8256, according to Bloomberg data.

While a stronger yuan will help cut costs in imported fertilizers and pesticides, some agricultural sectors may face a “collapse” if exchange-rate pressures climb, the China Chamber of Commerce of Import and Export of Foodstuffs, Native Produce & Animal By-Products, said in an April 2 report on its Web site.

Chinese Exports

Chinese exports of vegetables, fruits, aquatic products and tea will “totally” lose their competitiveness should the yuan strengthens, said the chamber, affiliated with China’s commerce ministry. The report proposed adjustments to tax rebates on agricultural products to aid farming businesses, most of whose profit margins are between 2 percent and 3 percent.

The yuan probably will strengthen in time without the Chinese government taking any public action, said Donald Straszheim, the director of China research at International Strategy & Investment Group.

“They will start to allow the currency to gradually appreciate, and we will know what has happened by looking at the tape,” Straszheim said.

The Treasury hasn’t labeled any country a currency manipulator since 1994. The Treasury’s currency report has been delayed in the past under both Democratic and Republican administrations. In January 1999, President Bill Clinton’s Treasury even published a compendium of those that had been due in 1997 and 1998 and President George W. Bush’s administration also repeatedly missed the deadline.

Latest Delay

The latest delay “is probably the politically smart thing to do,” with Hu planning to be in Washington for talks with President Barack Obama, said Charles Freeman, a China expert at the Center for Strategic and International Studies in Washington.

“I’m not sure Treasury really knows what it wants to do yet,” said Freeman. “It’s testing the political waters on Capitol Hill.”

Geithner said April 2 that Hu’s visit, along with a meeting of Group of 20 finance ministers and central bank governors this month and a U.S.-China Strategic and Economic Dialogue scheduled for May, will offer “the best avenue for addressing U.S. interests at this time.”

“Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months,” he said.

To contact the reporters on this story: Phil Mattingly in Washington at [e-mail]; Greg Stohr in Washington at [e-mail].

Last Updated: April 4, 2010 01:23 EDT