Chinese Ministry Denies Geithner's Currency Claims

The Wall Street Journal
JANUARY 25, 2009, 10:37 P.M. ET

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.

Meanwhile, a top official in China's central bank said the charge that Beijing manipulates its currency was inaccurate and implied there were bigger issues to address in the global financial crisis.

"In recent days persons in a Western country have said 'China is manipulating the yuan exchange rate,' " said People's Bank of China Vice Governor Su Ning, according to a report Saturday by the state-controlled Xinhua news agency. "These remarks are not only inconsistent with the facts, but they are misleading about the reasons for the financial crisis."

Some Chinese commentators say the verbal sparring is a sign of greater trade friction to come with Washington. They noted that both sides' comments were written, not spoken -- and therefore should be taken as a serious view of intent.

"This is the first communication by the new president's team to China and it is provocative," said Shen Dingli, professor of international relations at Fudan University in Shanghai. China's official Xinhua news agency also weighed in Friday evening, saying that Mr. Geithner's claim "fans Sino-U.S. trade fears," alluding to concern in Beijing over protectionism in the new administration.

Chinese officials are deeply concerned that the global economic downturn could spur protectionist moves in the U.S. and elsewhere that could further damage China's trade-dependent economy. Mr. Geithner's comments marked a significant escalation in U.S. criticism of China's exchange-rate system.

U.S. officials have long argued that China should let its currency, the yuan, strengthen, which could make Chinese exports relatively more expensive and reduce China's massive trade surplus with the U.S. But the just-ended Bush administration stopped short of calling Beijing a currency manipulator.

In recent years, China did let the yuan strengthen, but stopped last year as its economy weakened. Some analysts have expressed concern that Beijing might let the yuan weaken, although Chinese officials have ruled that out. Almost no one in Beijing, however, believes the government would let the currency strengthen in the current environment, or abandon its controls over the currency -- especially given the disastrous results of liberal financial rules on other economies.
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Ba Shusong, expert from Financial Research Institute of Development Research Center of the State Council, China's cabinet, said "it is U.S. dollar that is the main currency being manipulated," in part because the U.S. is printing money to pay for its soaring budget deficit. He noted that China and other developing countries hold U.S. dollars as their foreign reserve on the premise that the dollar is being managed responsibly. But in recent years, the U.S. "didn't assume its responsibilities."

Some traders and economists argue that, given Mr. Obama's reputation for pragmatism, the accusation over currency manipulation could have been made to give the U.S. an advantage in the early stage of fresh dialogue with Beijing on foreign exchange and trade.

"I expect Beijing will keep the yuan largely stable this year," said Isaac Meng, an economist at BNP Paribas. "Traders needn't worry about Geithner's remark unduly."

Chinese financial market participants were sanguine about the statement. The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 0.7% at 1990.66. The Shanghai Stock Exchange government bond index ended flat at 120.71.

"Geithner's comment wasn't that unexpected because people had anticipated the new Obama administration would take a relatively protectionist and populist stance toward China," said a Guangzhou-based trader at a foreign bank.

While there is concern about protectionist rhetoric coming from Washington, China wasn't a major factor in last year's presidential election and both parties agree that China is a key partner in U.S. foreign policy.

In fact, Washington and Beijing could become partners in solving other world-wide problems like global warming, says Scott Kennedy, a professor at Indiana University. In doing so, Washington is likely to call on China to take a more active role. "With a changing of the guard in Washington, China has the opportunity -- and challenge -- of doing much more."