Geithner: China to pursue 'broader' role for yuan

US Treasury Secretary Timothy F Geithner said he anticipates China will oversee a bigger international role for its currency as part of a “necessary” adjustment as it implements a more market-based economy.

“They’re becoming more open to the world, and with that, you’re going to see the currency take on a broader role internationally,” Geithner said in a Bloomberg Television interview in Mumbai on the eve of a previously unscheduled visit to China. “That’s a healthy, necessary adjustment.”

China has promoted greater use of the yuan as a unit of trade, while keeping limits on flows of capital in and out of the country and preventing the free conversion of the currency. Policy makers are considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in trade, said an official at the China Foreign Exchange Trade System, a subsidiary of the central bank.

Geithner reiterated that governments around the world need to achieve “more balanced, more stable” growth than in the past. As part of that effort, the US is increasing its savings, he said. Policy makers also need to ensure “growth in their countries comes more from domestic sources,” he said.

Geithner 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, a policy that some US lawmakers say gives Chinese exporters an unfair advantage.

Geithner, whose two-day trip to India concluded today, will meet Chinese Vice Premier Wang Qishan in Beijing tomorrow, according to Treasury spokesman Andrew Williams.

Yuan forwards traded near the highest level in 11 weeks on speculation the central bank will scrap a 21-month-old peg to the dollar as part of efforts to limit inflation.

Geithner on April 3 announced the postponement of an April 15 deadline for an annual policy review, which may have resulted in China being labeled a currency manipulator.

He said meetings over the next three months will be “critical” to bringing policy changes that lead to a more balanced global economy.

The yuan’s exchange rate is not the cause of China’s trade imbalance with the US, Jiang Yu, a spokeswoman for the Chinese Foreign Ministry, said in Beijing yesterday.

Twelve-month non-deliverable forwards traded little changed at 6.6395 per dollar as of 5:30 pm in Hong Kong, after earlier gaining as much as 0.2 per cent, according to data compiled by Bloomberg. They reflect bets the currency will climb 2.9 per cent from the spot rate of 6.8256. A stronger yuan would make imports cheaper and so help contain inflation, which reached a 16-month high of 2.7 per cent in February.

Geithner also said Congress and the Obama administration would soon reach agreement on legislation to overhaul the US system of financial regulation. “We’re getting very close now,” he said.

The Treasury chief said it’s “critical” that Congress does not water down efforts to tighten oversight of derivatives by allowing too many exceptions to new rules. He said he was “very confident” that the final bill will include tougher language than the version passed by the House of Representatives last year.

“We’re going to make sure that the ultimate package is strong enough that these carefully designed exceptions don’t provide a vehicle for an opportunity for people to evade the basic protections,” Geithner said. “We’re not going to support a vehicle that is vulnerable to those kinds of loopholes.”

Geithner said the Federal Reserve needs to stay involved with bank supervision so that it’s not too “tentative” in responding to future financial crises. When asked about a Senate proposal to take small bank supervision away from the Fed, he said the US must be careful not to make “the firefighter more reluctant to act” as has happened in other countries.

“We need to preserve a substantial role for the Fed in the basic business of supervising banking institutions,” said Geithner, who was president of the Federal Reserve Bank of New York before assuming his current post.

A regulatory overhaul needs to create a system that provides strong and consistent oversight of big firms like Goldman Sachs Group Inc and American International Group Inc, Geithner said in the interview.

The US needs to “make sure there is a competent agency in charge of, and accountable for and with the ability to limit their risk-taking, so they are managed more carefully, more conservatively, and pose less risk to the system as a whole,” he said.

Asked about the increase in yields on US Treasuries in recent weeks, Geithner said some of it can be attributed to “fundamental” improvements in the economic outlook. “You’re seeing a natural healthy process of confidence restored,” he said. He added that the Obama administration wants to start cutting the fiscal deficit next year. “We’re committed to that.”