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Archive for May 29th, 2009

Geithner’s got it wrong re: China

Posted by WARREN MOSLER on 29th May 2009


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This is what happens with an administration that does not understand imports are real benefits and exports real costs.

This is a proactive move that hurts our real terms of trade and real standard of living.

Geithner to Urge China to Boost Demand, Official Says

by Rebecca Christie

May 28 (Bloomberg) — Treasury Secretary Timothy Geithner
will urge China to boost domestic demand and loosen controls on
the yuan in his first trip to the nation since taking office,
while readying a defense on queries about sinking U.S. bonds.

In meetings with Chinese leaders in Beijing June 1-2,
Geithner will encourage China to move toward a more flexible
exchange rate, a U.S. Treasury official told reporters in
Washington. He will also answering any questions the Chinese may
have about the dollar or the U.S. budget deficit, the official
said on condition of anonymity.

While delivering a familiar U.S. message on reducing
China’s reliance on exports, the Treasury chief may meet an
unprecedented level of concern about the outlook for Treasuries.
China is the largest foreign holder of U.S. government debt,
which has handed investors the worst loss since at least 1977
this year as forecasts for federal budget deficits ballooned.

“We’re going to be flooding the world with debt for a
while,” said Tim Adams, a former U.S. Treasury undersecretary
for international affairs who helped lead the Bush
administration’s economic policy with China. “We’ve got to hope
that that the Chinese are willing to keep buying.”

China held about $768 billion in Treasury securities as of
March, according to U.S. government data.

U.S. Commitment

The U.S. is committed to reducing its budget deficit and
maintaining deep and liquid markets for government debt, the
official said in a briefing before Geithner’s May 30 departure.

To spur the U.S. economy, Geithner has said the
administration needs to run deficits in the short term. For the
fiscal year that ends Sept. 30, the deficit is projected to
reach a record $1.75 trillion, according to a Congressional
Budget Office forecast.

The widening gap has contributed to the tumble in
Treasuries, which have lost 5.1 percent, including reinvested
interest, so far this year, according to Merrill Lynch & Co.
index data. The dollar has also been hammered, with the Federal
Reserve’s trade-weighted Major Currency Dollar index sliding 3.2
percent so far this year.

Chinese Premier Wen Jiabao in March expressed concern about
the value of the nation’s U.S. investment. Also in March,
central bank governor Zhou Xiaochuan advocated a “super-
sovereign reserve currency” disconnected from any individual
nation, casting doubt about the long-term role of the dollar.

Wen, Hu Meetings

Geithner is set to meet with Wen during his trip, along
with President Hu Jintao and Vice Premier Wang Qishan. In
addition, Geithner will deliver a speech at Peking University on
U.S.-China economic relations and take part in an economic
development event that features U.S. companies.

The Treasury secretary is confident the U.S. dollar will
keep playing an important role as a reserve currency for a long
time, the official said today.

The Beijing talks will include the importance of open trade
and the need for both the U.S. and China to move toward balanced
long-term growth strategies, including a flexible currency
policy, the official said.

Since mid-2008, when China’s leaders began to take measures
to address an economic slowdown, the yuan has hovered around
6.84 per dollar. That rate was reached after a gradual
appreciation since July 2005 from a level of about 8.3 yuan, a
peg China had maintained since 1995.

So far this month, the yuan is little changed, closing
today at 6.829 per dollar.

‘Manipulating’ Label

Geithner has avoided a showdown over China’s currency
policy, declining to repeat comments he made in written remarks
to lawmakers after his Senate confirmation hearing in January
that China was “manipulating” its currency.

In its first semiannual report on foreign-exchange policies
since Geithner became secretary, the Treasury said April 15 that
while the yuan remains “undervalued,” it didn’t meet the
standard for illegal manipulation in the second half of 2008.

China will need to keep buying dollars if it plans to keep
the yuan tethered to the dollar, said Brad Setser, a former
Treasury official who is now an economist at the Council on
Foreign Relations in New York.

“If China insists on pegging to a now-depreciating dollar,
it isn’t clear that China will be doing anything other than add
to its dollar portfolio,” Setser said. “China’s public
expression of concern about its dollar holdings is somewhat at
odds with its policy of pegging to the dollar quite tightly.”

When notes and bonds of U.S.-backed companies such as
Fannie Mae and Freddie Mac are included, China’s holdings of
U.S. debt come to about $1.55 trillion, according to Setser.
“China will certainly raise its concerns in some form,” he
said.

Geithner, 47, will need to “say all the right things”
about the U.S. fiscal shortfall, said Adams, who accompanied
former Treasury secretaries John Snow and Paul O’Neill on trips
to China. “There’s enormous concern about the size and
intractability of the deficit,” said Adams, who is now a
managing director at the Lindsey Group, an investment consulting
firm in Fairfax, Virginia


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