Light is right

US/China: Timothy Geithner was right not to call China a currency manipulator in his February report to Congress. Doing otherwise could have been counter-productive. The US Treasury Secretary has not gone soft on China for keeping its currency cheap. Instead, he has smartly read the political winds.

Geithner’s report pointed to three smoking guns: China’s large trade surplus with the US, which widened in November to $26 billion; the huge pile of foreign currency — some $2.9 trillion at the last count — that China has bought up to keep its currency under control; and the largely unchanged real exchange rate. China’s yuan has nominally strengthened four per cent since June, but adjusted for inflation it is cheaper than it was in mid-2008. All three factors suggest a currency below where it should be.

So why stop short of applying the formal label? One reason is that trade flows are still too weak to sustain a US-China tit-for-tat. Proclaiming China a manipulator would oblige Geithner to take steps that could end in unilateral trade sanctions. If China retaliated with curbs on US goods — as it almost certainly would — America’s already jobless recovery could suffer. Monthly exports from the US to China are now twice what they were at the beginning of 2009.

An even better argument for US restraint is that China is due for big political change. In 2012, President Hu Jintao will step down, and probably hand power to vice-president Xi Jinping. Little is known about Xi’s views, but he told reporters in 2009 that he doesn’t like taking advice from “foreigners with full bellies”. For Geithner to take a tough line against the outgoing leadership would at best be pointless, and at worst add an anti-American edge to the handover.

Geithner can afford to wait. China’s inflation is above target, with consumer prices rising at around five per cent a year. That does some of the work a currency appreciation would, pushing up the yuan’s “real” value. Besides, the oil price rising above $100 a barrel gives the world’s number-two importer an urgent reason to strengthen its currency on a nominal basis as well. The US may get some of what it wants without having to resort to name-calling.