China’s growth slows as Geithner stirs currency concerns

Chinese Shares in U.S. Fall to 2-Month Low on Growth Concern(Bloomberg): Chinese stocks trading in the U.S. fell to the lowest in two months, led by commodity producers, after the world’s third-largest economy grew at the slowest pace in seven years.

The nation’s leaders “will do anything” to maintain an economic expansion of about 8 percent, the government’s target for creating jobs, said Huang Yiping, Asia economist at Citigroup Inc. in Hong Kong. The economy grew 9 percent for all of 2008 after a 13 percent expansion in 2007.

China Is ‘Manipulating’ Yuan, Geithner Tells Congress (Bloomberg): Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.

From Geithner’s confirmation hearing…

I do believe it is a significant issue. As I said earlier, I believe it is important for the United States and the global economy that our major trading partners operate with a flexible exchange rate system and that market forces determine the level of those exchange rates. I think that’s very important, and …when I have some time to think through how best to achieve that objective look forward to a chance to work with you and your colleagues on the committee on how we do that.

On Thursday, Geithner submitted written answers to the Senate Finance Committee.

Obama believes China manipulating yuan: Geithner(Reuters): President Barack Obama believes China is “manipulating” its currency, his choice to head the U.S. Treasury said on Thursday using a term the Bush administration had deliberately avoided for years to describe Beijing’s foreign exchange practices.

Under U.S. law, labeling China as a currency manipulator would require the Treasury Department to begin “expedited” negotiations with Beijing — either bilaterally or through the International Monetary Fund — to reduce China’s huge trade surplus with the United States and eliminate any “unfair” currency advantage.


Comments from Andrew Busch, global currency strategist with BMO Capital Markets in Chicago…

Rookies make rookie mistakes.  Our new President is not immune to this disease.
This is a situation where the US has known for a very long period of time that China has managed it’s currency.  The US chooses not to name China as a manipulator for two reasons.  One, China doesn’t meet the Treasury’s narrowly defined criteria.  Two, China owns a lot of US Treasury, Agency, and overall debt securities.  To engage in any action that would lead the Chinese to misunderstand actions by the US and therefore sell these holdings would be dangerous.  But rookies do what rookies do:  they make mistakes.
If this is indeed the new tactic being taken by the Obama administration, they will generate a weaker US currency and higher US bond yields.  Not exactly what they should be doing in their first 100 days in office.  This is the Obama’s first brush with the markets and they will quickly learn to exercise discretion in the future.

Short View: Currency interventions(John Authers with the Financial Times): See Authers’ report on the global currency situation.

During his trip to China in December, Henry Paulson handled this issue with care while making the U.S. interests felt among Chinese leaders. Geithner has pushed the envelope. Nothing may come of this as both countries are stuck in an economic recession. The concern that China will sell its Treasury portfolio may be exaggerated. Who would they sell to and what would they buy?