The Baseline Scenario blog has some interesting insights into U.S. Treasury Secretary Geithner's upcoming China trip.
So what should we expect from Geithner’s upcoming China trip?
China refuses to talk politely about its exchange rate and rebuffs all sensible diplomatic initiatives on this front – they have held the IMF at bay for nearly 2 years on this exact issue. The rhetoric is that their fiscal stimulus will bring down their current account surplus without need for significant exchange rate appreciation. This is smokescreen.
The reality is that the administration is afraid that China will shift out of its dollar holdings, pushing up interest rates on Treasury debt and jeopardizing their Fiscal First reflation strategy. The Chinese have played up these fears by speaking obliquely on the desirability of a non-dollar international reserve currency – this is a pipedream, but you get the point.
The administration has essentially blinked in the face of Chinese growling.
Baseline Scenario is stating not only did the United States lose the game of chicken confrontation with China on currency manipulation, but also the United States cannot postpone this issue.
Here is the press conference for The Currency Reform for Fair Trade Act of 2009 (H.R. 2378):