HONG KONG — U.S. Secretary of State Hillary Clinton on her maiden overseas trip has a golden opportunity to show that the new administration of Barack Obama understands and is prepared to make its best efforts to put America’s most important bilateral relationship on a surer footing. I’m not talking about her visit to Japan, important though that is, but about what she does in Beijing.
She will have an opportunity to put right the unfortunate impression created by Treasury Secretary Timothy Geithner in his Senate confirmation hearings when he accused China of “manipulating” its currency. What was he thinking about?
If President Obama was using the treasury secretary as a lightning rod or political playmaker, the whole world must be worried about how savvy he will be in handling the next part of the massive economic and financial mess.
China duly denied the charges. Premier Wen Jiabao blamed the West for the global recession, including “inappropriate macroeconomic policies . . . unsustainable model of development characterized by prolonged low savings and high consumption . . . blind pursuit of profit . . . failure of financial supervision.”
I hope that Obama and Geithner winced, not least because the treasury secretary (as head of the New York Fed) was one of those financial supervisors who failed to supervise. The treasury secretary was responding to written questions, so his ill-advised remarks cannot be passed off as thoughtless or off-the-cuff. He crossed the line by saying that China was “manipulating.” This word has legal implications; the United States must negotiate formally with countries that appear on its list of currency manipulators.
The question remains: Was Geithner addressing the Chinese, or was it a macho message to Congress?
Either way, it is time to cool it. Macho posturing is not the way to sort out the next and more dangerous stage of the global economic mess — the immense imbalances in the real economy. Geithner could have said China “managed” or “massaged” its currency, if he wanted to point a gentle finger.
Beijing does massage its currency, and it might respond that it would be foolish to entrust the value of the yuan to the whims of the market. Look at the mess that Japan is in with the high value of its yen hurting exporters as the country plunges deeper into recession. Or look at the poor British pound, which has fallen from almost $2 to $1.40 in a matter of weeks, and to almost parity with the euro.
Maybe markets do return to equilibrium in the long run but, as John Maynard Keynes noted, in the long run we are all dead. Recent rapid gyrations in currencies help no one except speculators — not exporters or importers, who cannot properly price their goods.
Yes, the yuan has been appreciating too slowly. But the biggest disaster now would be if Beijing started to massage its currency toward depreciation. It would be bad for the world because it would set off explosive protectionist forces.
Washington should not throw stones at the rest of the world from its glass house. Because the dollar is the world’s reserve currency, the mighty U.S. alone has had the freedom, happily abused to the fullest extent, to disregard rules of good economic management that it has enforced — through its shareholding in the International Monetary Fund — on other poorer and weaker countries.
A major problem has been the Faustian pact between the U.S. and China under which China enjoyed an undervalued currency that let it export products cheaply to the rest of the world and create a virtuous circle of increasing investment, industrial upgrading and new jobs. In return, Americans were able to live beyond their means, enjoying cheap Chinese products, many of which were brought to them courtesy of American companies like Wal-Mart, whose profits and expansion were boosted by their increasing investment in China.
Recently China has realized that its export advantage and its massive holdings of U.S. debt instruments — about 75 percent of the $2 trillion in reserves — also pose a liability. If it tries to offload or diversify its reserves, it risks having the yuan appreciate, further evidence of the symbiotic relationship between China and the U.S.
The global financial meltdown and the real economic damage have common roots in the attitudes of the West that it was good to get things for free and that living beyond one’s means is not necessarily a vice.
Still, this recession provides an opportunity to work out a new system and new game rules. This must involve not just the U.S. or the Group of Seven rich countries but also China, bilaterally with the U.S. and multilaterally, India and other leading developing countries.
It must be a deal that looks at the global financial and economic architecture and the rules for trade, aid and economic development. It is as much political as economic, which is especially why Geithner’s accusations were a mistaken opening shot.
It will be tough on everyone because it means involving China as a key team member of Global Economy Inc., a role that President Hu Jintao has been reluctant to grasp. It also involves taking the sting out of the currency row by helping Beijing to boost China’s domestic growth — goods for the Chinese at the expense of goods for the world.
Rebalancing and redirecting China’s industrial growth will not be easy for China and less so for the U.S. — because Americans will have to save and buy only what they can afford and their government will have to bring its own finances into order and consult with China and others before making decisions.
In the medium term, long before we are all dead, it will be good for the Chinese people and for China, and better for the world, in helping to bring about high and sustainable growth.
Kevin Rafferty is editor in chief of PlainWords Media.
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