Geithner in Beijing. I’ll Bite

Thursday, April 8, 2010 4:37
Posted in category The Big Picture

so, it goes without saying that when the Treasury Secretary diverts his plan to land in another country, a country who was looking at being called out as a “currency manipulator”, it is going to peak the interest of many. And it has. Wall Street Journal was first on the scene with their piece Geithner Plans to Meet China Vice Premier:

In his visit, announced unexpectedly on Wednesday, Mr. Geithner is expected to outline the U.S. rationale for why China should allow its currency, the yuan, to rise, according to U.S. government officials. The U.S. doesn’t expect to come out of Beijing with an explicit agreement on the currency, officials said. But they added there are “encouraging” signs the Chinese are preparing to let the yuan appreciate.

So basically Geithner is here to play let’s make a deal.

[UPDATE: New York Times says the deal is in the bag in their story China Is Reportedly Set to Revise Currency Policy] Relevant pieces inserted below

[UPDATE 2: Wall Street Journal has just released their coverage at the event in the article Geithner, Wang Discuss Global Economy. Relevant pieces inserted below

Open questions at this point being (1) What will the deal be? (2) What will the deal cost? and (3) How will this deal impact those whose monies cross the border?

First, a bit of speculation. From my point of view, this is THE meeting before a material move in the exchange rate, and I suspect that red wine (perhaps cut with a bit of Sprite) is being guzzled as I type this. And I say that because after watching 5 years of off and on back and forth over the issue, this is the first time anyone has diverted a meeting (much less their plane) to bring principals together. Surely, Wang Qishan did not just call him with an opening line like "Tim, Zhenme yang? Uh, we me and a few of the folks in the "hai were talking about this RMB valuation thing... and, well, we decided you were right. We want to come clean. You in the neighborhood?" To which Tim said (after picking up his phone) "well, whadya know, I am actually just boarding a plane to return to the US from India (overseeing that Dell move and all).. Could be there in say 6-7 hours."

[UPDATE: So apparently, as covered in the Wall Street Journal followup piece, this actually was a driveby: A Treasury official said the 75-minute meeting took place in the VIP terminal of Beijing International Airport.]

My guess is that Secretary Geithner and Vice Premier Wang Qishan are there to set up the framework for their bosses to ink during their upcoming meeting (who says nukes and currencies don’t mix)… which leads me to my first round of questions. that assuming this is the real deal… it CERTAINLY is not what is being sold in the press:

Mr. Geithner, who has consistently said it is in China’s interest to move on its currency, is expected to tell Mr. Wang that China’s economy would benefit from a more-flexible exchange rate, likely citing such factors as the limitations that a fixed exchange rate puts on China’s ability to control monetary policy, and the need to become less dependent on exports.

So, questions one and two: (1) How much will the change be, and (2) is it a one off revaluation, or will it be a move within the “basket” that China “floats” its currency on?

[UPDATE New York Times piece lays out the deal: The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday.]

[UPDATE 2: WSJ followup seems to back the go slow approach by pointing to recent comments to the new addition to the Chinese side of the table, Mr Xia Bin - PBOC Advisor: China adopted the stable yuan policy to counter the effects of the global financial crisis, but the policy is no longer necessary because "the worst of the crisis is over," Mr. Xia said. However, he suggested that any rise in the yuan should be small, saying a large yuan appreciation wouldn't be beneficial to the domestic or global economies.]

Next .. what happened, why now, and what did it cost the US?

The lead up to the congressional report was a well laid path, and the “rescheduling” of the release of said report from the print shop was already spun through the news cycle. So, what is it that Geithner had to give up in the last 48 hours to make this meeting happen? A meeting that occurred with Obama in Beijing, and resulted in a lot of press about Chinese standing up to US pressure.

This revaluation came at a costs, and moving beyond paying for the haircut that China is going to take in their treasury holdings, I am curious to know what the US put up in return. Perhaps with Palin leading the Tea Party my post on giving up Alaska has legs? Ok. Not likely. Could it be a removal of all those political barriers that stand in the way of Chinese buying up US Assets? Or perhaps a concession on something more politically important? Any thoughts?

Finally, and assuming there is a material move in the currency, and its policy, how will that impact the various stakeholders in and out of China. here are some quick thoughts:

Government:
1) US Secretary Geithner and Vice Premier Wang Qishan – Win. Team work prevailed
2) Obama – win. RMB revaluation hailed globally (unless.. well.. the final figure is 1%)
3) Hu – Even. This is not a deal that would not be done unless it benefits the masses in China, but a bit of face may be lost

Investors:
1) Overseas Investors in China – Win, with a catch. Money moved into China grows, but still going to be a pain to get it out.
2) Local Investors holding overseas assets – Lose later.
3) Local investors looking to go overseas – Win. Assets just got cheaper

Corporation
1) Exporters from US looking to import to China – Win. Their products just got cheaper, and that makes them more competitive locally
2) Exporters from China looking to import to US – Lose. Their products just got more expensive
3) Chinese manufacturers looking to move up the value chain – Win. Acquiring technology just got a lot cheaper

Consumers:
1) Chinese – win. Money goes a lot further now. Wealth transfer can begin. Retailers are sure to offer RMB revaluation discounts.
2) US consumer – lose. Stuff at Wal-Mart costs more.
3) US labor – little impact. Jobs are not going to return to US, but increased cost will raise the bar on further loses to China (loses may move to other places)

Did I miss anyone?

UPDATE – I did miss someone. China’s Asian trading partners, who would be negatively impacted as well.

In the end, I will admit that the above is all speculative, and Geithner could have just as easily walked into a trap where he was berated for not dropping the manipulation report earlier, but I think this time progress has been made, and that means that firms should take a quick moment to see if their bases are covered on this one.

.. and if not, then perhaps Geithner should call ring up the Great Decider, who just happened to be in Shanghai today speaking about the perils of protectionism at a financial conference.

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