With the Yuan artificially cheap it makes Chinese imports cheaper and US exports to China more expensive. China has a massive trade surplus with the USA.
Currency policy is a key element to national economic health. An example is the auto industry.
“Japan’s yen subsidy provides the average imported Japanese car a $4,000 windfall cost advantage over U.S. automakers and other competitors in the U.S. market — a windfall that ranges up to $10,000 per vehicle for higher-end Japanese imported SUVs such as those sold by Toyota under the Lexus brand”, according to the Automotive Trade Policy Council.
Trade policy is one of the key issues in the Obama administration yet it is extremely delicate
(AP)However, Geithner also suggested that now might not be the right time to brand China as a currency manipulator under U.S. trade law, a designation that would trigger negotiations between the two countries and could result in U.S. economic sanctions against China.
He said Obama has pledged to use all the diplomatic avenues open to him to seek change in China’s currency.
[The full text of Geithner’s comment to the Finance Committee and a link to his all of Geithner’s written answers to the Finance Committee is on the flip]
In a report co-authored from China, Geithner’s remarks prompted a response from China. While polite on both sides the comments from the Chinese government were written, evidence of it being a serious statement.
(WSJ)BEIJING — A Chinese ministry Saturday strongly denied Obama administration claims that China “manipulates” its currency, as the first contact between the new administration and China takes a markedly sour tone.
On Thursday, President Obama’s nominee for Treasury secretary, Timothy Geithner, told U.S. lawmakers that President Barack Obama, “backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.” No Chinese official of Mr. Geithner’s standing has fired back — a move analysts say shows that China doesn’t want to overreact to the statement — but Saturday morning an official from China’s Ministry of Commerce said “we never have used currency manipulation or exchange-rate manipulation as a mains to gain an advantage in international trade.” The statement, provided by an official from the ministry’s news department, also said China would not “rely on devaluations” of its currency, the yuan, to promote exports.
The full text of Geithner’s response:
“President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices. More broadly, we look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China’s growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home.”