Friday, January 30, 2009

What does Obama want of China?

The evidence of policy stance of the new administration towards China is scarce. The only significant comment comes from Tim Geithner, the Treasury Secretary. In talking about the U.S. economic policy, he says that "strong dollar is in the national interest of the U.S.". However, turning to China, he also says of China "manipulating" its currency value, meaning, RMB needs to appreciate.

Now let's set aside first China's right to "manage" (as the U.S. often did during the 80s) exchange rates. Let's try to decipher what the heck he really means. So, in Geithner's mind, China needs to appreciate currency value against dollar, which is against the national interest of the U.S. Maybe he is being deliberately ambiguous? Not likely, he isn't Fed Chairman. Or he may imply the Dollar needs to be strong against other major currencies, like Euro, but weak against RMB. That would imply that RMB appreciates way more against the Euro, which doesn't seem likely, not to mention trillions of IOU notes U.S. issued to China - and continued Chinese support that needs for the new debt. Of course, in the event of RMB appreciation, it automatically deflates. Therefore, the only consistent interpretation, it seems, is that Dollar needs to be "strong" in order to support the bailout plan, but the U.S. wants to get an upper hand in the "currency manipulation" blame game, so it can pressure China to appreciate RMB and thus alleviate the U.S. debt burden later.

I suspect this would be the central theme in US-China relationship during early part of the administration. It would be very interesting to see how this plays out.

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