Exchange Rate Verbal War is Becoming a Chicken Rib

Right now at the Senate Committee on Banking, U.S. Secretary of Treasury Timothy Geithner is saying that China is allowing the RMB exchange rate to appreciate rapidly and is reducing its intervention of the RMB exchange rate. Four months ago at the same occasion, designated Secretary of Treasury Geithner condemned China’s “Exchange Rate Manipulation.” Now, four months later, he argues that the U.S. should drop China from the list of currency manipulators, saying that the Chinese exchange rate policies have changed significantly in the past two years.

The before and after self-contradictory judgments from the same senior official at the same occasion obviously shows the White House’s attitude change toward the judgments on currency exchange. It has also led to massive media reports in China and the U.S.

Geithner’s sudden attitude change toward the RMB exchange rate problem in only four months time shows that he is quite a different person before and after. This looks new, but it is not. During the Bush years, the Secretary of Treasury at that time, Henry Paulson, had a similar “performance.” He condemned China first for manipulating the exchange rate, then defended China later. In the U.S. he said that the RMB is not the main reason for the huge amount of trade surplus, though when he went to China, he pressured and requested the RMB be appreciated. All of this is not uncommon among Chinese economic and financial sectors and between senior officials of diplomatic circles at the highest decision-making level.

The question is, this dramatic attitude change from Geithner, the head of Obama’s financial and economic team, is it a clone of Paulson’s “performance?” Are there any differences between the reasons of the two?

From the time point of view, Paulson’s “performance” happened during the last two years of the eight years under President Bush. Geithner’s “change” happened right after Obama was sworn in. From a U.S. political point of view, what Paulson was supporting was the Republican policies of Bush, who had lost his reputation and became a “lameduck.” At that time, Bush needed him to take on Congress, which was controlled by the Democratic Party. Now what Geithner is supporting is Obama, who is like a star with the highest reputation, and most are Democrats in both the Senate and the House in Congress. Obama does not need too much help from him what with the positive relationship between the Democratic government and the Democratic Congress.

More crucial is that Paulson’s verbal war against Chinese exchange rates occurred during the false period of prosperity in the U.S. when the economy was in crisis, driven by the real estate bubble. The direct driving force was the impairment of interests of labor-interest groups behind huge amounts of trade deficit and so on. But Geithner’s verbal war against Chinese exchange rates occurred after suffering the most serious financial crisis since the Great Depression. Urgent collaboration with countries around the globe, including China, is needed to help the U.S. walk out of this difficult time. The direct driving force is only to meet what Obama promised during the presidential race and the questioning of some of senators in Congress.

Geithner’s “change in tone” is a reason for his visit to China on June 1st, but it’s not the main reason. China and the U.S. will cooperate to solve the global financial crisis, especially during this time when the U.S. keeps spending large amounts of money to stimulate its economy. The public opinion “challenge the dollar” initiative by Zhou Xiaochuan, the president of the People’s Bank of China, incited widespread concern from the major global economies. The U.S., which is at the front of the storm, was frightened.

Another intention of Geithner is to dig an outer passage for its domestic money, which is almost like shifting its trouble onto others. In 2005, the reform mechanism was formed by starting the RMB exchange rate and after three years the RMB was appreciated by 21 percent. Since September 2008, the financial storm has come from Wall Street in the U.S., and from that time on the exchange rate from dollars to RMB began to enter at about a one and a half year “expected appreciation.” During this one and a half year period, former President Bush passed his economic stimulus plan that included hundreds of billions of dollars. Obama’s economic stimulus plan has even reached 787 billion dollars, and the gradually less-powerful dollar has become a powerful shelter where the U.S. government is printing money to pay high national debts and the Federal Reserve is printing money to help the White House save the market. At present, this wave of action has come to an end, and the U.S. should start exporting inflation to all over the world. The so-called “encourage the appreciation of RMB” initiative, I am afraid, is questionable.

Of course, the strategy to reduce the imbalance of trade between two countries is the most convenient, using fast and expert strategies, and it is also one of Obama’s reasons why he is not giving up this verbal topic.

No matter what purpose and intention, Geithner’s verbal performance on Chinese exchange rates will probably not embarrass China. In the later period of Bush’s administration, especially during the Sino-U.S. Strategic Economic Dialogue, China gradually mastered tricks against the U.S. on issues such as the RMB exchange rate. For action, China promotes the reform process, gradually promotes the marketization of the RMB exchange rate, RMB localization and internationalization. For diplomatic negotiations, they should learn how to argue with reason, how to deal with and play games with the U.S. For public opinion and relations, besides continuing to argue for the better and propagandizing, they should take the initiative at the right moment, just as what it says in Zhou Xioachuan’s series of essays: fight for public opinion, initiative and the commanding point.

Since China is able to “be ready for all kinds of situations,” the U.S. will keep losing the “eyeball effects” of the verbal war on the RMB exchange rate because the verbal war has gradually become a chicken rib that is “tasteless but a pity” among China. Obama, who is advocating change, should give it up with determination.