China cannot continue to resist upward market pressure on its yuan currency without facing higher inflation and rising asset prices, US Treasury Secretary Timothy Geithner said recently.
Geithner, in an interview with CNBC television on the sidelines of a Group of 20 leaders summit, said he believed there had been progress on China currency issues and authorities in Beijing believed that it was important to let the appreciation process continue.
“If you resist those market forces that are just a reflection of confidence that you’re going to see strong growth in China, strong productivity growth in China, if you resist those market forces, that pressure is not going to go away,” Geithner said. “It’s just going to end up in higher inflation or higher asset prices and that’ll be bad for China.”
A draft copy of the G20 leaders’ final statement calls for them to move “toward more market determined exchange rates and enhancing exchange rate flexibility rate flexibility to reflect underlying economic fundamentals.”
Geithner said this was important because countries that resist such fundamental exchange rates pressures would only increase problems for countries with more flexible currencies.
“What that means is all the pressure you see falls disproportionately to those emerging market economies that allow their currencies to move and that’s unfair to them and creates a set of broader tensions in the economy that are worth trying to avoid,” he said.
Weaker dollar in US interest?
Geithner also defended US exchange rate policy, saying IN the interview the United States would never deliberately weaken the dollar.
“The US will never do that,” Geithner said, responding to a suggestion by former Federal Reserve Chairman Alan Greenspan that Washington was pursuing a policy of weakening the dollar.
“We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” Geithner said. “It’s not an effective strategy for any country and it’s not for the US We’ll never do that.”
Greenspan wrote in a Financial Times guest column published in early November that a weak US dollar policy, coupled with the suppression of China’s yuan currency, was driving up exchange rates in the rest of the world.
Geithner attributed the dollar’s weakness to a reversal of safe-haven capital flows and a return to risk appetite. He said two and a half years ago the dollar began rising because the world was concerned about depression and systemic collapse and sought “the safety of the risk-free assets of the US.”
“The dollar generally rose during that period of time and as the world becomes more progressively confident, some of (those) safe haven inflows have been reversed,” he told CNBC. “That’s been the dominant trend we see, that’s very encouraging,” he added.
He also said that leaders from the Group of 20 wealthy and emerging economies will endorse the G20 finance ministers agreement to avoid competitive currency devaluation and limit excessive current account imbalances.
“It’s worth stepping back to see what are basic objectives of this proposal and they are to make sure that as the world recovers, we don’t set in motion the types of forces that could lead to re-emergence of excessive imbalances around the world – deficits and surpluses – because those would threaten our future growth,” he said.