Timothy Geithner, the US Treasury Secretary, has said that the government cannot force China to change its currency policies. He was responding to the recent criticism that the government was not doing enough to stop China from maintaining its currency at a depressed level.
Prominent economists like Paul Krugman have voiced their concern that by keeping the Yuan devalued, China is hurting the US economy. The Yuan is currently pegged to the dollar at a level that is believed to be about 25-40% lower than its market value. Most of the other major currencies float in the market, which means that they are traded at a level that is a true reflection of the country’s economy and trade.
By keeping the Yuan devalued, China is able to keep its exports cheap. This means that exporters from other countries, including the United States, are unable to compete with Chinese products in the global market. Some economists believe that this is one of the contributing factors to high unemployment in the US, and by forcing China to adjust its currency, the government would be able to improve employment levels.
The US Treasury publishes a report every six months that identifies countries which manipulate their currency. There is increasing pressure on Geithner to label China as a currency manipulator in the report so that further action can be initiated. The problem is that the Treasury cannot call someone a currency manipulator simply because they have pegged their currency to the dollar. But those who are in favor of strict action against China say that the impact of China’s currency policy is so serious on the US economy that it should be seen as a special case.
Geithner, however, does not seem to believe that US can do much to change China’s policy. He said that he expected China to allow Yuan to appreciate on its own and that US intervention at this point would not be the right decision.
The Obama administration is treading cautiously when it comes to dealing with China. There have been disputes over President Obama meeting the Dalai Lama despite Chinese objections, and Google threatening to exit China if it continues to censor its search results. With so much diplomatic strain and so much at stake – China is the second largest trade partner of the US – the administration does not want to make a move that would spoil the relationship between the two countries.