Posted by: Dexter Roberts on May 29, 2009
Beneath the usual diplomatic niceties, there is likely to be some real friction as U.S. Treasury Secretary Timothy Geithner meets top Chinese officials in Beijing early next week. Premier Wen Jiabao and vice premier Wang Qishan are worried that Washington’s profligate spending policies will lead to inflation and dilute the value of China’s more than $1 trillion in U.S. assets—a concern they will certainly bring up. Beijing too is increasingly pushing for a larger international role for its currency the renminbi, which would by necessity weaken the leading global role the U.S. dollar now plays. In March central bank governor Zhou Xiaochuan called for a new “super-sovereign reserve currency” to replace the dollar. That was followed by a series of currency swap agreements signed between China and some of its trading partners including Malaysia, South Korea and Argentina.
The Obama administration of course, sees its massive fiscal spending as necessary to keep the U.S. economy on track, even as American consumers cut back on their spending. In a press briefing in Washington on the eve of the visit, a Treasury official said Geithner would press the Chinese to allow their currency to be more freely tradable. The hope is that a strengthened renminbi would help narrow the massive trade deficit between the two countries. Equally important of course, is that Chinese begin to break their frugal habits, start spending more, and so pick up some of the slack left by the collapse in U.S. spending. Geithner too will encourage Beijing to find ways to boost consumption at home, the Treasury official said. (A stronger renminbi would make U.S.-produced goods more attractive in China, of course.)
Unfortunately, Beijing knows all to well that seriously strengthening consumption as an economic driver is a long term project. And for now, helping the hard-hit export sector—which employs tens of millions of migrant workers—remains a top priority, no matter what Washington thinks. On Wednesday, China’s State Council announced new policies supporting export manufacturers including short term export credit insurance totaling $84 billion, as well as new tax rebates for both labor-intensive and high technology industries. The goal is to help them “protect world market share,” said a report on Xinhuanet.com. At the meeting that was presided over by premier Wen Jiabao, China too announced its intention to keep the value of the renminbi “basically stable” and at a “reasonable and balanced level” to help support Chinese exporters. That’s hardly what Geithner could have been hoping to hear, just before he arrives for his first visit to China as Treasury secretary.