Wednesday, April 7, 2010

Mr. Geithner Goes to China

Treasury Secretary Tim Geithner will meet Thursday with Wang Qishan, the Chinese Vice-Premier responsible for economic affairs. The agenda of the meeting is unknown. At least one probable subject of discussion is the exchange rate policy that has been followed by China in recent years.

The word of the street is that China may widen the daily trading band for their currency and allow the renminbi to trade over a wider range. This could allow the currency to gradually appreciate against the dollar, present China as a cooperative partner in global trade, and help to build for more open world trade going forward.

It is reported that “The Chinese foreign ministry would adhere to three principles on currency policy: any change must be controlled, it must be Beijing’s own initiative and any shift must be gradual.” (See “Geithner heads to Beijing for talks”:

This points to the fact that the major issue here is a political one, not an economic one. China is on the upswing in the world and is playing out its options “close to the vest.” It is bargaining for the long run, and those that see the world only as a series of “short-runs” fail to understand the Chinese mind.

In a recent post, “Why should China Change,”, I wrote: “One piece of advice some people gave me several years ago about the Chinese has proven to be very perceptive. They said that whereas people in the West have very short time horizons, generally in the three to five year range or less, the Chinese have a much long perspective of history. They think in decades rather than years.”

As a consequence of this the Chinese do not want to rush into anything, any new arrangement, without a full consideration of the implications of what they are about to do. Again, from my earlier post, “My guess is that China does not plan to overdo it for they have more to gain in the future if trade is more open than not. I believe that the Chinese know that they will be better off over the longer run if world trade is more open rather than more restricted. Hence, they will not go far so as to create a trade war that will be detrimental to achieving a more open world trade. China’s investments in natural resources and companies throughout the world underscore this bet.”

And, the United States? “The United States is in a weakened position. Thus, the Chinese can achieve more now by taking advantage of this weak position and still achieve the longer-term goal of more open trade. The United States is in no position to resist this and will not be in a position to resist this for some time. And, it would hurt us more to act aggressively at this time to introduce more trade protection than it would China. Hence, advantage China.”

Yet, China does not want to “overplay” its hand.

The meeting this Thursday is a positive sign. The word is that “The secretary and the vice-premier have been working together to find an opportunity for some time,” according to a spokesperson for Secretary Geithner. Geithner, being right next door in India, found it very convenient to arrange a side trip for such a meeting.

As stated above, no agenda was reported for the meeting and there is no expectation that a statement will be issued when the meeting ends.

Still, leaders at this level don’t just agree to meet unless there is something going on. Furthermore, in recent months “conciliatory gestures” have been made by both sides. And, there was the April 2 telephone conversation between the presidents of China and the United States, a conversation that “reached an important new consensus” between the two parties according to the Chinese minister for foreign affairs.

Stephen Green, an economist with Standard Charter in Shanghai, was reported by the Financial Times to have said that “Some grand bargain between the US and Beijing appears to be in the works, if it hasn’t already been struck.”

As a prelude to the meeting, Geithner stated on television on Tuesday that the decision to revalue the renminbi was “China’s choice”. He also added that he believed that China would see that it was in their long run interest to work with a more flexible exchange rate policy in the future.

So, it seems that the pieces are in place and the meeting is at hand.

The bottom line is that it is in the interest of the United States to take a longer run view of things. For the past fifty years or so, the emphasis of the United States economic policy has been on the short run. As a consequence, the United States has focused undue attention on current levels of unemployment, short-run growth projections, and temporary fixes to markets and industries and, in the process, has established an inflationary-bias to monetary and fiscal policies that has produced more than an 80% decline in the purchasing power of the dollar. Individuals and families found that in such an environment the best way they could save was to buy a home and watch the value of the house appreciate. They didn’t need savings because their net worth was rising with the price of their home.

This short-run focus produced mounting deficits that had to be financed off-shore since Americans, themselves, were not producing the savings necessary to fund them. Thus, the rest of the world helped to finance the inflationary binge and now we in the United States have to bear the burden of this myopia.

We can see now that a nation with a longer-term focus can trump a nation that just focuses on the short-run. If the United States is going to match up with China, and with other rapidly emerging nations in the world, then it, too, will have to lengthen its perspectives to the longer-run. Perhaps we are seeing this change in the progress that has been made leading up to this meeting.

And, maybe this gives us another picture of the underlying operating process of the Obama administration. In the current issue of Time magazine, Jon Meacham comments on “The New Book on Barack Obama,” titled “The Bridge” by David Remnick, the editor of the New Yorker. Meacham writes that Obama has a recognition that “politics (and life) is in the end more about the journey than the destination, since no destination is ever really permanent.” And, he argues, the president is “a patient man because journeys require patience” and this “helps explain his understated doggedness.”

If this administration is truly working from a longer-run perspective, maybe this is one reason that many of his critics, who have just a short-term myopia relating to policy and achievements, are so unhappy with him. We shall see.

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