SPEAKING SOFTLY AND ...

Treasury Secretary Tim Geithner’s speech at Peking University last week seems to have been better received there than in Washington. Some currency hawks are lamenting that he saw the need to go to apologize (again) for stating the obvious fact that China has been manipulating its currency for a long time now.

In fact, the speech does not include any apology (though private conversations with official Chinese might have). Nor did it represent what some in the media portrayed as a backtracking from the Obama campaign’s tough line on China. On the contrary, it is a thoughtful, reasoned explanation for the need for China and the US to work closely together to “lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established.” The speech should be studied carefully, in my view. The text can be found at http://blogs.wsj.com/chinajournal/2009/06/01/full-text-of-geithners-speech-at-peking-university/.

In fact, I found a lot to admire and agree with in this speech. For example:

§ It rests quite clearly on the expectation that Beijing will start to assume responsibility for the health of the global economy.
§ Geithner made clear that sustainable growth in China “will require a substantial shift from external to domestic demand, from investment and export driven growth, to growth led by consumption.”
§ At the same time, the US will have to increase its savings (i.e. reduce the rate of consumption growth) and should be expected to reduce its current account deficit (the broad measure of borrowing from abroad) as the recovery proceeds.
§ Its global perspective: “China and the United States individually, and together, are so important in the global economy that what we do has a direct impact on the stability and strength of the international economic system. Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.”

With respect to the value of the renminbi – a major nexus between Chinese and American growth strategies – Geithner called for a “more flexible exchange rate regime.” There’s not much new in this. Since the days of John Snow, Treasury has used that phrase as code for a stronger RMB. Indeed, only that meaning makes Geithner’s key sentence other than nonsense. He said: “Greater exchange flexibility will help reinforce the shift in the composition of [Chinese] growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future.” That had to refer to a stronger RMB, not one subject to greater fluctuations.

So, unlike some others. I see in Geithner’s speech most of the elements of a sensible approach to the vexatious currency problem. He has lowered his voice, especially compared to Henry Paulson’s histrionics. He has placed the central issues – sustainable growth strategies for China and the US – on the table for the Strategic and Economic Dialog. He did not back down on the need for a substantial revaluation of the RMB as crucial to a sustainable global recovery.

He’s speaking wisely and more softly. To make the Rooseveltian strategy complete, all he needs is a big stick, some means of compelling Beijing to make politically hard decisions. John Snow at one point told a business delegation in his office that they “should hold our feet to the fire so we can hold the Chinese feet to the fire.” That, I believe, is the most important function of the Currency Reform for Fair Trade Act of 2009 (H.R 2378 and S. 1027). Let’s hope the Secretary will prove willing and able to use it.