U.S. Steps up its Rhetoric on China’s Yuan Policy

Bloomberg:
“The distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing we need,” Geithner said in testimony to the Senate Finance Committee today.

The Senate will vote “soon” on a measure aimed at getting China to raise the value of the yuan, Senator Charles Schumer of New York told Geithner at the hearing.
“This is fair warning,” said Schumer. Lawmakers, “despite the administration asking us not to do it, are going to move forward with our bipartisan legislation to provide specific consequences for countries that fail to adopt appropriate policies.” Schumer said yesterday that the Senate would vote within two weeks.

“We want China to provide a level playing field for the products of American workers and investments by American companies,” Geithner said. “And we want China to change its growth strategy to rely less on exports and more on consumption.”

Since July 2008, the yuan has been held by officials around 6.83 per dollar, after Premier Wen Jiabao’s government allowed a 21 percent advance in the prior three years. In April, Geithner delayed the release of a twice-yearly report on whether China or any other country is manipulating its exchange rate.

Thoughts:
With the U.S. increasing its pressure on China to adjust its currency, China may decide to give into the pressure soon (possibly by the end of the year?). However, the U.S. does not have much leverage, being that it relies heavily on China to purchase its debt. Premier Wen Jiabao might be laughing out loud after hearing Geithner’s comments, especially since China’s exports recently increased the most in six years. Other than maintaining good political relations, there is little incentive for China to make changes.

Daniel A.
Summer Analyst
Analyze Capital, LLC