Geithner comments revive China currency bill hopes

[Joanne98]

WASHINGTON, Jan 23 (Reuters) - A U.S. manufacturers group urged Congress on Friday to quickly pass legislation to curb imports from China after a top member of President Barack Obama's team said Asia's largest economy was manipulating its currency.

U.S. Treasury Secretary-designate Timothy Geithner's remarks on Thursday were "a clear signal to Congress to send the new president a strong currency manipulation bill during his first 100 days in office," Kevin Kearns, president of the U.S. Business and Industry Council said in a statement.

Geithner, who is expected to win Senate confirmation next week, told the Senate Finance Committee on Thursday that Obama "believes that China is manipulating its currency," -- using a term the Bush administration deliberately avoided.

China's Commerce Ministry, in a statement faxed to Agence France Presse on Friday, said the Beijing government "has never used so-called currency manipulation" to gain an unfair trade advantage and lashed out at what it called "unsubstantiated criticism." For details, see

Still, Geithner's blunt language has revived hopes for a bill that both Obama and U.S. Secretary of State Hillary Clinton co-sponsored in the Senate last year, Kearns said.

That proposal would define currency manipulation as a subsidy under U.S. trade law, opening the door for the Commerce Department to impose countervailing duties on an array of Chinese goods.

http://www.reuters.com/article/marketsNews/idUSN2332441320090123

[Joanne98]

1. What Nouriel Roubini said today about this...

The Financial Sector: Nouriel Roubini has become famous the world over after his predictions regarding a burst housing bubble and subsequent credit crisis proved to be prescient. He's made plenty of other predictions which turned out to be correct as well, such as the collapse of investment banks and other banking-sector problems. He said the economy entered a recession way before it was announced by the National Bureau of Economic Research.

On the eve of the annual economic conference in Davos next week, he has an opinion piece in today's Wall Street Journal. No doubt it's being followed by many, so let's see what he has to say.

First "2009 will be tougher than many anticipate." The U.S. banking and financial system are facing credit losses close to $3 trillion, which leaves it "insolvent." This recession will prove to be "most severe of the postwar period" and what's worse is that "all of the world's advanced economies are in recession."

Second, because there are insolvency issues, the effectiveness of monetary stimulus will be "constrained." The risk of rising interest rates, following the issuance of a wave of Treasuries, will erode "the growth effects of fiscal stimulus packages."

What will it take to fix things? "Only when insolvent banks are shut down, others are cleaned up, and the debt level of insolvent households is reduced will conditions ease." Until then, because the market will continue to face jolts from worse-than-expected economic and financial news, "we can expect further downside risks to equity markets and other risky assets."

In the middle of this is the complex relationship between the U.S. and China. The U.S runs a fiscal deficit, which means it has to borrow in order to finance. China is currently the largest holder of U.S. debt with about $700 billion worth, primarily because it's in their best interests to do so. Part of the reason for that is because China's economy is export driven to a large extent and it benefits them to have a relatively weak currency. Purchasing U.S. debt tends to drive their currency lower because it takes dollars out of circulation. This system works when demand is strong but what might happen now that demand is weakening?

While China is not an enemy per se, it is a strategic rival and there's a "battle" going on for economic dominance (which basically means the limited supply of commodities that will be in short supply once the major economies begin expanding at their trend potentials again). That means the U.S. is vulnerable now, because it depends on China and other strategic rivals to fund a deficit which is certain to grow as tax revenues shrink and the government spends hundreds of billions on stimulus packages.

According to Roubini, "China can't simply pull the plug on all this financing without suffering a considerable amount of self-inflicted pain. Reducing its financing of Washington would, among other things, put significant upward pressure on the value of China's currency, sharply undermining its export sector and, therefore, the country's economic growth."

The danger is that "the ability and willingness of China and others to finance U.S. deficits will diminish as they begin to run fiscal deficits of their own. They'll need to use their financial resources at home just as a tsunami of U.S. Treasury bond issuances peaks."

On top of all this is a new president which has said in the past that China manipulates its currency. Yesterday, in written testimony to the Senate, Tim Geithner repeated this belief. Certainly, these words will heighten the tensions between the two nations and it comes at a time when the U.S. is depending on China to continue purchasing its debt. If China decided to retaliate it would do so by selling Treasuries, which would raise interest rates and cause the dollar to plummet. And if interest rates rose sharply (likely because supply would go through the roof, dragging down prices) at the same time as the dollar rapidly fell, it could look like a currency crisis and make things even more destabilized than they are already.

http://www.forexpros.com/news/forex-news/dollar-index-and-the-financial-sector-23234