The new US treasury secretary in the President Obama administration, Timothy F Geithner, has ushered in a more confrontational approach toward China by bluntly saying that the new US administration is of the opinion that Beijing is "manipulating" its currency, and therefore the US will act "aggressively" using "all the diplomatic avenues" to change the China's currency practices.
China's control of the value of the yuan has been a sticking point with the US for years. A number of economists have been reported as saying that China artificially kept its currency low to make its goods cheap and generate trade surpluses, leading to a global capital imbalance with American consumers borrowing to spend, and China attaining the position of the largest foreign creditor of the US.
The Bush administration had earlier warned China about its currency practices, though without the aggression or hard stand. Geithner's comments seem to signal a change of strategy possibly on account of the Obama administration being more open to challenging China in more aggressive ways.
Geithner's comments are in line with Obama's campaign promises to harden the stand with respect to China's trade policies, even though he said that the immediate priority should be shoring up the flagging Chinese and US economies. He was quoted in the media as saying that the immediate goal should be to convince China to adopt a more aggressive stimulus package "as we do our part to try and pass a stimulus package here at home."
Geithner said new data from Beijing was evidence of the fact that growth dropped sharply in 2008, and a further slowdown could postpone recovery from the global economic downturn.
These comments are sure to put Geithner on China's wrong side, which did not spare outgoing Treasury Secretary Henry M Paulson Jr. for far less aggressive comments.
Reports said it remains to be seen whether the Obama administration would up the ante and declare to Congress that China's manipulation of its currency is with a view to gain an unfair trade advantage, which could potentially spark a punitive reaction from China.
In response to his comments, China's commerce ministry said it had not manipulated the value of the yuan to make its exports more competitive. It said accusations of government interference in foreign exchange would fuel US protectionism.
Reports quoted an unnamed ministry spokesman as saying that China would keep its currency stable, and would not depreciate the currency to support exports.
The rebuttal was an official statement to Geithner's comments, and the yuan's value remains a sore point between two of the largest economies in the world. The prospect of the row undermining cooperation to counter the global recession is also real, reports said.
China limited appreciation of the yuan vis-a-vis the US dollar in July 2008 after its currency rose 21 per cent against the dollar after the expiry of a fixed exchange rate three years earlier. In an article published by the official Xinhua News Agency, People's Bank of China vice governor Su Ning, termed Geithner's allegations as "untrue and misleading."
Economists have said that China's optimal strategy would be to keep its currency steady, and that the nation would first protect its own interest before coming to the concerns of other economies.
Other economists predict that the relationship between China and the new Obama administration wold be a tough one, with China being a natural scapegoat for the problems in the US.
However, they acknowledge that China would not devalue its currency since the drop in exports is on account of a decline in demand, as opposed to the price of goods.