One Phone Call/Two Countries Chat: US-China Showdown May Be On Way


geithner wang qishan.jpg
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
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


20 comments on “One Phone Call/Two Countries Chat: US-China Showdown May Be On Way

  1. David says:

    “As to whether the Bush administration would start a war to defend dollar hegemony; that’s a question that should be asked of Saddam Hussein. Iraq was invaded just six months after Saddam converted to the euro. The message is clear; the Empire will defend its currency.”
    If I remember correctly – and I knew when Saddam did this that his days were numbered – Jim Baker said something along those lines, sort of indirectly. He said something along the lines that the Gulf War was about jobs, which I think translates about the economy, which I think translates about the petro-dollar as the medium of exchange seen as vital to America’s economic interests – which trumps everything.
    “Vital national interests” always translates into war in one form or another. And sadly, I don’t see America or Americans emerging from this retrogressive, ultimately destructive, mindset anytime soon.
    Going viral on the nativist reactionary right is a picture of Obama holding Fareed Zakaria’s book THE POST-AMERICAN WORLD with the caption that Obama is selling out the United States, as evidenced by reading a book by a fellow Muslim about the end of the United States. I am not making this up. I got one of these because it was circulating among Palin fans I know. It is certainly at the level of intellectual development of those folks, some of whom have pretty high iq potentials but are victims of seriously arrested geopolitical intellectual development, one of whom is Bill Kristol. He probably rejects this particular piece of anti-intellectual caca de toro, but he seems to think Sarah Palin is a good idea, or at least he did.
    John McCain just suffers from that intellectual disorder called blind political ambition – and he is by no means alone.


  2. MarkL says:

    I agree with WigWag that TWN is really rocking these days. I don’t know how Steve sleeps or eats.
    Maybe he has Starbucks IV at Logan Circle.
    I don’t think anyone who comments here regularly is unintelligent (well, except for one person, and that’s not POA, FWIW), but I wish certain people would see the pointlessness of having the same arguments, day after day, on the same subjects, to the last syllable and beyond.
    At least stay on topic!
    And no, that doesn’t mean every post is about Israel and/or false flag terrorist operations.
    I used to enjoy reading erudite comments on Steve’s topics by knowledgable people in the threads. It’s harder to find such comments anymore.


  3. questions says:

    Sweetness, no, I don’t. I spend too much time here. Were I to post somewhere else as well I’d have to give up breathing in order to have time!
    But feel free to stop by here once in a while….


  4. Sand says:

    “…Posted by PissedOffAmerican
    I see Wiggie has reverted back to old habits.
    “Sweetness”, indeed…” & “…And POA, think of it this way, if Sweetness really is WigWag,..”
    –Oh my… OT but I just had this really funny vision — WigWag & Sweetness as Rimmer and Mr Flibble… sorry I couldn’t resist.
    “…Mr. Flibble is a hologramatical hand puppet penguin. He is fluffy and malevolent, and often “very cross.” In the episode Quarantine, Arnold Rimmer wore Mr. Flibble on his hand and together they terrorised the rest of the crew. Rimmer had been infected by a hologramatical virus, the “Hex virus,” which gave him mental powers, but also made him completely psychotic. Both Mr. Flibble and Rimmer were armed with the power of Hex vision. When they attack with this power, their eyes glow red, and then a deadly beam of energy is discharged from their eyes…”


  5. Sweetness says:

    Hey, questions, unfortunately I won’t be staying long. Do you post


  6. questions says:

    Thanks for the shout out. Welcome back. Nice to have another sane voice around here.
    And POA, think of it this way, if Sweetness really is WigWag, then you don’t have to double your protest posts. But if Sweetness is actually another living breathing thinking being, you have your work cut out for you. Either way it’s good. You have less work and can relax, or more work and your time will be better structured! I call that a win-win situation.


  7. PissedOffAmerican says:

    However much Sweetness “missed” Wig-wag, it didn’t seem to diminish her willingness to opine that some of Wig-wag’s comments are “bigoted garbage”, that need to be “waded through”.


  8. PissedOffAmerican says:

    I see Wiggie has reverted back to old habits.
    “Sweetness”, indeed.


  9. Sweetness says:

    Wig writes: “I hope your decision to stop posting at the Washington
    Note was merely because you grew bored or irritated with the site
    or had better things to do; not anything more serious.”
    Pretty much. Thanks for your kind words. Stunning how this blog is
    frozen in time. Guess everyone will grow old together throwing
    rocks at each other. I do miss you and Questions, however.
    Best of luck


  10. trblmkr says:

    Even if China lessens or suspends its participation in future Treasury auctions an alternative source of demand is standing by. Think, think! It’s right there in front of us (and I don’t mean the Fed).


  11. JohnH says:

    The oil/dollar doubters might also be interested in this piece from China’s Global Times:
    China has resisted Iranian membership to the SCO, not wanting to unduly antagonize the US. Unfortunately, the US has a propensity to get antagonized all by itself.
    “China’s best move, particularly as the leader of the SCO, would be to encourage and facilitate the acceptance of Iran’s membership into the pact quickly before a new round of sanctions are imposed.
    Doing so would not only add strength to China’s ability to access Iran’s energy sources, it would also very seriously dampen any unilateral moves, whether sanctions or missiles aimed at Iran and its nuclear facilities. Israel’s hard-line government might support a military intervention, under no small influence by Washington.
    But most importantly, through this inclusion, and following China’s lead, the SCO could offer Washington’s lawmakers, lobbyists and beltway pundits a unique model with which to pursue a new kind of potential rapprochement with Iran: one of their own. On February 21, 1972, a man named Richard Milhous Nixon stepped off a plane at an airport in Beijing. And the rest is history.”
    Iranian oil would almost certainly be priced in RMB.
    Wigwag and sweetness: get your heads out of the sand!


  12. JohnH says:

    I’m not the only one who thinks that the world revolves around oil. Check out what the US’ Energy Information Administration says: “Crude oil dominates U.S. imports just as it dominates world trade.”
    BTW I’m not the only one who knows it. Unlike Washington group thinkers, I’m the only one who is willing to talk about it.
    A Chinese move to buy natural resources in RMB would have significant repercussions on the dollar. Iran would be delighted–it would mean more business for their oil bourse, opened two years ago.
    Wigwag and sweetness might be interested in what an investment adviser’s analysis of the role of oil in US hegemony.
    “As to whether the Bush administration would start a war to defend dollar hegemony; that’s a question that should be asked of Saddam Hussein. Iraq was invaded just six months after Saddam converted to the euro. The message is clear; the Empire will defend its currency.
    Similarly, Iran switched from the dollar in 2007 and has insisted that Japan pay its enormous energy bills in yen. The “conversion” has infuriated the Bush administration and made Iran the target of US belligerence ever since.”
    The whole nuclear weapons program is just a “made for TV” false pretense.


  13. WigWag says:

    Sweetness, I’ve missed your intelligent, friendly and incisive commentary and I’ve missed your extraordinary lucid writing style.
    I hope your decision to stop posting at the Washington Note was merely because you grew bored or irritated with the site or had better things to do; not anything more serious.
    It’s nice to hear your voice again.


  14. Sweetness says:

    Nice to see you’re still posting here, Wig.
    And look! JohnH still thinks the world revolves around oil–and HE
    is the only one who knows it!


  15. WigWag says:

    “And as for the dollar, maybe the Chinese will simply decide to reimburse their oil and natural resource suppliers in Chinese currency.” (JohnH)
    Chance that will happen is easy to calculate; the chance is zero. Come to think of it, why aren’t the Iranians pricing their oil in yuan? (Could it have anything to do with the fact that the currency isn’t convertible?) I would be delighted if they tried it.
    By the way, JohnH, oil and other natural resources are important but their importance has to be kept in perspective. Otherwise the Chinese would be diversifying into the Iranian Rial or the Saudi Riyal.
    Why not try a real counter argument to my comment. That is, if you can think of one.


  16. JohnH says:

    Chortle away, Wiggie. But your information is getting dated–rapidly. The CIA World Factbook counts China’s GDP at 61% of the US. At current growth rates, China could close the gap in 5 years. I doubt that it will happen, but it is now within the realm of possibility.
    And as for the dollar, maybe the Chinese will simply decide to reimburse their oil and natural resource suppliers in Chinese currency. What’s the point of buying and selling in dollars anyway? Those countries might be more than happy to get their hands on a currency that can supply them lots of cheap manufactured goods.
    The US is going to face some very tough negotiations.


  17. Liz says:

    I recently read a few blog entries from a Harvard economist, Dani Rodrik. I know nothing about this economist, but it was interesting that he pointed out that China’s 2001 entrance into the WTO has restricted China’s options in managing its own economy.
    I also read another post that inferred that China’s huge reserves may actually be a negative rather than a positive. In that post, the author stated that the United States had a huge gold reserve just before the Great Depression. His point was that reserves do not protect a nation’s economy. Interesting stuff.


  18. WigWag says:

    First of all; to Steve Clemons, the Washington Note is getting better and better. Almost all the posts you put up this month were really provocative, informative and entertaining. I just have to say, this blog is fantastic. It shows what you can do when you take a break from schlepping all over the world and stay in one place for a week or two.
    I only wish that I could read the Nelson Report. I know Washington insiders depend on it and I know it’s very expensive. I have to assume that it’s worth it or people wouldn’t be shelling out big bucks to pay for it. Is their any way for the peons of the world like me to ever get a look, even at articles that might be a few weeks old?
    Pertaining specifically to this post, this sentence really made me laugh,
    “One version has it that Geithner 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.”
    A sizable void at the next treasury auction; how stupid are we supposed to be?
    Has anyone been looking at what’s happening in the currency markets? The U.S. dollar is surging just like it does any time there is even the slightest hint of trouble anywhere in the world. Greece, Ireland Spain, the Baltic nations and even Poland are all facing severe economic pressure and may even default; if they do, the Euro will collapse; if they don’t, those nations will have to be bailed out by French and German taxpayers. For goodness sakes, there’s even a question whether the Euro itself will survive.
    There’s nothing new in this. Every time the world faces a crisis; there’s a stampede into the dollar; in the current crisis even the price of gold is declining; what does that mean? The dollar isn’t as good as gold; it’s better.
    Think about it; for the past 18 months we experienced a financial meltdown of extraordinary severity. The crisis was precipitated by faulty regulation of the American financial markets and by serious problems in the U.S. residential real estate market. Despite the fact that the crisis was born and bred in America; when things looked bleakest where did the entire world run for safety? The U.S. dollar.
    What exactly do people think the Chinese are supposed to do with the enormous surpluses that they are generating? They can put those surpluses into the proverbial mattress; they can recycle them by investing in the United States or buying American goods and services or they can convert them into other currencies by buying bonds denominated in currencies other than the dollar.
    What are the prospects for the Euro? Economic growth in the Euro Zone and the United States will probably be similar. Several nations in Europe have sovereign debt to GDP ratios and debt to current deficit ratios significantly worse than faced by the United States. What do you think is more likely; the prospect that French and German taxpayers will refuse to bail out Greece, Ireland Spain and the others facing default or the prospect that the United States Government will refuse to bail out California? Do you really think that the Chinese government thinks diversifying into the Euro is a good idea? Is that what you would be doing about now if you had currency reserves?
    If it’s not the Euro, what nation’s debt can the Chinese Government buy? Israeli Shekels? Mexican Pesos? Japanese Yen? Venezuelan Bolivars?
    And even if the scenario existed where there was less than unlimited demand for U.S. treasuries than there is right now, what would the Chinese accomplish by diversifying their currency portfolio? If they succeeded in weakening the dollar what would happen to their accumulated wealth? What would the political implications be in the United States for reprisals against Chinese imports? And anyway, if the dollar declined, wouldn’t American exports be far more competitive than they are right now? Does anyone think that a weaker dollar just might help the unemployment crisis that we are facing?
    Anyone who thinks the Chinese are holding most of the cards should short the U.S. dollar; if they have the guts.
    The United States has the largest GDP (nominal) in the world; more than three times that of China (which is number 3 in the world). The United States has the 4th largest per capita GDP in the world, 800 percent larger than China’s (which has the 89th largest GDP per capita in the world). China’s restive population is held in check by exactly one thing; enormous economic growth. Does China want a trade war with the United States? I sincerely doubt it. If they do, anyone betting on China to prevail would be a fool.
    Steve gets to read all kinds of inside information; maybe he can call his friend George Soros and ask him whether he’s shorting the dollar right now. If you do, Steve, let us know what George says. I’d be happy to place a bet that Soros isn’t shorting the dollar at least in the near or medium term.
    The idea that the Chinese won’t be showing up at the next Treasury auction is laughable. You would have to be a dimwit to believe it.


  19. PissedOffAmerican says:

    Nice table setting. Did the menu include melamine???


  20. jhofer says:

    IMHO the Chinese have the trump cards. If I were them, I’d negotiate a hard, hard deal. Something along the lines of: China agrees to allow a significant revaluation of its currency if the US agrees to not meddle with China’s oil and gas supply. That means bugging out of Central Asia and not interfering in Iran. It sounds like a win-win for both sides to me. Look for neocons to be jumping out of windows in Washington if it happens.


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