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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10 Responses to “Geithner in Beijing. I’ll Bite”

  1. Jesse Covner says:

    April 8th, 2010 at 10:56 am

    Hi Rich,

    “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)”

    Thing is, this is what they talk about in the US media. China is somehow “stealing” US jobs because they are merchantilstic with the currency exchange. But anyone who knows about manufacturing in China knows that a 5% – 20% valuation is not going to change the equation between workers who make $3000 / month in the US and $600 / month (if that) in China. Not for labor intensive work anyway.

    “2) US consumer – lose. Stuff at Wal-Mart costs more.”
    So were is the win for USA? So much talk about China cheating the system. Now what?

    This was a bogus issue all along. And now the US is going to go through with this in order to score political wins, and help some of the investment class.

  2. michael says:

    April 8th, 2010 at 3:08 pm

    Interesting post. I enjoy reading what experts in China have to say about this issue.

    A couple observations: From an accounting point of view, is it accurate to say China is taking a haircut on their treasury holdings? If you’re devaluing your currency, isn’t the loss the same regardless of when it’s realized.

    Second, when you say the impact on U.S. labor is little, I guess it depends on how you define little. Even if jobs lost in China don’t return to the States, there still might be a positive impact on labor relative to the magnitude of the revaluation.

    Anyways, enjoyed reading the post. Maybe I’m swimming too deep.

  3. chinese life says:

    April 8th, 2010 at 6:12 pm

    haha,china is so strong,no!

  4. sdcgew says:

    April 8th, 2010 at 9:21 pm

    I guess the one benefit of the stronger RMB for the US is that goods from US companies become cheaper. That would help folks like Cisco, HP, etc complete against Huawei, Lenovo, etc both in China and in other countries.

  5. Rich says:

    April 8th, 2010 at 10:12 pm

    Jesse

    I’ll attempt to answer the “where does US win in this”. First, it will all depend on the move that is made (I am guessing 3-5%), and what the adjustment to the basket is.. and how fast that moves. That being said, the US wins as “American Made” products will become more competitive in China, which has been a major bone for the US for a while – that the RMB was a barrier to US imports competing. Which is a big win should the RMB revaluation unlock domestic consumption, and spur domestic investment from the industrial sector

    Second, longer term, the revaluation of the RMB and the upward pressure on consumer items into the US is not a bad thing. It is seen short term as a shock (again, depending on the level/ speed of move), but slowing down the trade from CHina through higher prices is a good thing for the US trade deficit. Third, and this is longer term as well, as new firms/ products come up in the US, they will be less likely to move to China, which is a win again.

    … of course, the biggest win is political, and that may drive some to say that it is therefore an empty win, but longer term the move should provide a stronger balance in the market (consumer and otherwise).

    R

  6. Rich says:

    April 8th, 2010 at 10:14 pm

    Michael.

    Accounting issue – you are correct, a RMB revaluation would result in a currency loss on treasury holdings held in China (at PBOC, and otherwise).

    Jobs issue – can you explain what you mean when you say “positive impact on labor relative to the magnitude…”.

    R

  7. Rich says:

    April 8th, 2010 at 10:16 pm

    sdcgew

    agreed. That is what I would view as perhaps the most immediate gain from the US side… and perhaps Haeir too.

    R

  8. Jesse Covner says:

    April 8th, 2010 at 10:23 pm

    Hi Rich,

    I agree with you on theory. But I don’t see 5% making a big difference in terms of helping US employment and long-term economic welfare. I don’t even see 10% making a difference, except in creating inflation in the US. Remember, even if something is made in the US, often this just means final assembly.

    As you noted, if the revaluation makes enough difference to push manufacturers out of China, production will move to Vietnam, other countries…not back to the US.

    It is true that US exports to China (and I don’t know what that is BTW) will get a little bit more competitive. But in the long run, more benefit would come from focusing on improving education and creating more favorable conditions for key technologies.

  9. ian channing says:

    April 9th, 2010 at 5:17 am

    My liang fen: Any rise of less than 50% is not going to make a bean of difference to anybody. China will continue to be the workshop of the world, because its competitive advantage in terms of supply chain, logistics and manufacturing know-how and organization is so great compared with peer countries. India and Philippines, to name two, also have dirt cheap currencies and they cannot compete with China in manufacturing even now (in my experience the yuan is actually pretty strong in dollar-based buying power compared with the peso and rupee).

    And in the US, Joe Public will continue to shop at Walmart. I bought a Chinese-made wrench the other day, for five dollars. If it had cost six, I would still have bought it. Even if it cost ten dollars, I would have bought it. Because I remember that when it was made in the west, ten years ago, it cost thirty dollars. That game is over.

  10. Anders says:

    April 10th, 2010 at 4:01 pm

    Win. Other Asian trading partners US/Euro – who would get the jobs lost in China. Vietnam, Indian, Cambodia would get a raise in employment out of this. Could be good for the region. China wins regionally with even more economical strength.

    Dangers ahead. This could mean a surge in Chinese unemployment. If I were the CCP I would have waited 5 more years until the demographics were better in line with an appreciation….. Still the pressure got too much