My close pal, Chris Nelson, who was essentially blogging before there were blogs publishes the uber-insider Nelson Report (not online and available only to those who pay a super high subscription fee or who feed him insider political details that offset the $$).
I have an arrangement with Nelson that allows me to republish parts of his report that I find sizzling (it actually sizzles all the time but vanity prevents me from running his reports every day).
Today, Chris Nelson provides a Faulkeresque two-sided interpretation of a phone call between Treasury Secretary Timothy Geithner and China Vice Premier Wang Qishan.
One version has it that Geither said America just isn’t going to take China’s currency manipulating mercantilism anymore — and the other is that Wang told Geithner that if America didn’t keep taking it, then there would be a sizable void at the next Treasury auctions.
But best to read this direct from Chris Nelson:
The Nelson Report — 5 February 2010
GEITHNER/WANG QISHAN PHONE CALL…..two versions
SUMMARY: preceding the President’s talk to US business persons about the pressing need for China to allow the RMB to be revalued, Treasury Secretary Geithner called his Chinese counterpart, Wang Qishan.
Content of the call? Two Versions
From the US: Geithner warned Wang that patience here has expired, and that if China does not launch a solid move toward rebalancing by the end of March, Obama will authorize Treasury to “cite” the PRC for currency manipulation in the twice annual report to Congress, first due in April.
Chinese version: Wang told Geithner where he could put it, and seemingly threatened a pullback on T-bill purchases, and retaliation on US exports to China.
The fuller story. . .
US-CHINA RMB…on the “one phone call/two countries” chat noted in the Summary, the two versions are not mutually exclusive, since the alleged Chinese response
is substantially that made in public in December by Premier Wen.
And as we’ve reported, senior Treasury officials were in Beijing prior to this week’s excitements, relaying US concerns, and putting China on notice that revaluation was now the #1 US econ/finance issue for this year. Sources now indicate Treasury’s “take” on the militant Chinese response reflects one of two things:
Either a) there has been a clear State Council decision not to move and Wen is telling us all about it, loud and clear, or b) China’s domestic politics requires a period of strident “remarks” to the outside world before they actually do move, on their own terms, so it will look like it isn’t because the foreigners said to do so.
Sources also indicate Geithner himself was considering going over to Beijing in recent weeks. The Chinese allegedly said, in essence, if you come, we will be forced to embarrass you, so don’t come…that won’t be good for managing the currency issue.
We’d comment that this point of view, if accurate, is encouraging in the sense that it confirms a continued Leadership determination to not let things slide out of control…and it may also help explain Geithner’s optimistic remarks to senators yesterday.
However, sources also report what one calls “a rather furious debate” going on in China at the moment about all this between factions who see themselves as inflation fighters, “vs” the exporters and state planners.
Loyal Readers with insights…please don’t be shy.
Our Report items on the currency situation generally prompt a lot of informed response, informed in the sense of coming from real economists and China analysts who really understand this stuff…and not just the politics of it on both sides.
One sample last night, from an anonymous expert, picking up on the “don’t push me in public” point:
“Regarding the RMB, it has been in China’s macro-economic interest for many years to allow the RMB to float (or at least have a lightly managed float). Trying to manage the Chinese economy while having the RMB tied to the dollar takes away a significant monetary tool from the Chinese government. This has been said to the Chinese several times ever since the currency issue arose and the Chinese have acknowledge this for many years.
Thus, this is certainly no epiphany now and Secretary Geithner is not the first to say it. Also, one of the biggest challenges in engaging with China on the RMB issue is whether raising the issue in a more public and forceful way will either finally convince the Chinese leadership to allow it to float or make them less likely to do so out of concern that they would appear to be bending to the U.S.”
And this from another close observer on what might work, or not:
“We should all keep in mind that a Chinese revaluation of 5-10% would solve little. For them, it’s about managing hot money inflows. As part of a revaluation, they will unquestionably continue to protect their exports by ramping up subsidies, including the VAT. To be meaningful, a Chinese revaluation would need to be more significant…note Bergsten et al are still talking a possible undervalued range of up to 40% relative to the dollar.”
We should note the response yesterday of Heritage Foundation China economist Derek Scissors, who warns/worries that even a revaluation in excess of 40% wouldn’t meet Obama’s hopes:
“Chris…do we care about exports or net exports (the trade surplus)? From July 2005 through June 2008, the RMB rose 20% against the dollar. And post-appreciation H108 US exports to China were 90% larger than H105 (pre-appreciation). Success!
But the H108 trade deficit was still 30% larger than the H105 deficit. Is that kind of result going to make the President and, especially, Congress happy? There’s no chance the Chinese will proceed with a revaluation big enough to do what Congress wants.”
So summing up on revaluation…this discussion shows why we really need to watch to see if the Administration’s financial adults (Summers, Geithner, Volcker, etc.) advise Obama that the time has come to really go after the RMB as a strategic issue.
Congress has been pushing “currency legislation” for several years, now, and we’ve often noted in prior Reports that the sort of bill to watch would allow the Commerce Department to push CVD cases calling currency misalignment an “actionable subsidy”.
Advocates of that approach predict it would provide far more effective leverage than taking China to the WTO, or citing China as a currency manipulator under U.S. law.
Needless to say, this notion is why we have frequently reported on the “headline risk” vs “real risk” factor in currency legislation. Should Obama become so frustrated with China’s pace of action on the RMB that he authorizes a CVD approach, it wouldn’t just be Wall Street predicting a firm Chinese response…aka “a trade war”.
An concerned observer ruefully concludes:
“But if we want to get this done [get China to meaningfully revalue], we aren’t going to get there by ‘citing’ China in a report to Congress. That’s a very ineffective tool, or taking them to the WTO…either action would basically set up an extended ‘negotiation’ with no real ‘teeth’.”
OK, so what should the Administration be doing?
“More multilateral pressure (not the WTO, but using the G7, G20, APEC, etc.) and bringing together the developing countries, who are really getting hammered by the undervalued RMB (so much for China being a ‘champion of the developing world’!), and carefully calibrated bilateral pressure…”
Let’s leave last word for tonight to that good Republican lad, Derek Scissors, who adds this “larger” concern:
“The Obama Administration wants to support exports. Not all exporters can be supported; this naturally and inevitably involves picking beneficiaries of government aid. At the same time, the President has declared a desire to dissuade companies from certain other forms of international activity, through tax increases. There is a huge difference in degree between this and Chinese industrial policy, but is there a difference in kind?
The President could support exports by cutting related or general corporate taxes. Instead, he’s going to enlarge the government to support exports and enlarge the government again through levies to discourage outsourcing and investment overseas. I can’t wait to find out that some of the companies being taxed for their “bad” international activity are also being subsidized for their “good” international activity.”
The Nelson Report
— Steve Clemons