FOR THE RECORD:  Timothy Geithner explains U.S. government’s position on China’s Exchange Rate Policy 

On January 22, U.S. Treasury Secretary-designate Timothy Geithner responded to written questions from the Senate Finance committee on China’s exchange rate policy.

EXCERPTS OF TREASURY SECRETARY-DESIGNATE TIMOTHY GEITHNER’S WRITTEN TESTIMONY TO THE U.S. SENATE FINANCE COMMITTEE.

QUESTION:  As you know, for more than five years, I have been one of the leading voices in the Senate pushing China on its currency policy. First, Senator Graham and I pursued

a bill to apply a tariff to all Chinese imports; then we joined with Senators Baucus and Grassley on a bill that passed the Finance Committee 20-1 but never saw floor action.  President Obama talked a little bit about Chinese currency policy towards the end of the campaign, but has not offered many specifics. What I would like to know is whether you think the economic problems facing the nation and the world make confronting China over its trade policies in the short term MORE important and urgent, or LESS important. I would really like to understand the Administration ' s view on this, because some argue that our precarious economic position means we should wait, but others say that we have a window now to take meaningful action. On which side of that economic coin does the Administration fall?

 

SECRETARY-DESIGNATE GEITHNER:  President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China' s currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.

 

QUESTION:  While China’s currency has appreciated nearly 19 percent since Beijing removed it from its peg to the dollar in July 2005, manufacturers and workers in trade-sensitive industries - such as paper production in Maine - feel that the Yuan may still be undervalued by as much as 20 percent, making Chinese imports artificially cheaper vis-à-vis competing U.S. goods. These domestic producers argue that the undervaluation of the Yuan has contributed to the burgeoning U.S. trade deficit with China, which set another record in November 2008 of $40.1 billion. Do you believe that China’s currency remains artificially undervalued, and that this undervaluation has a trade-distortive effect harmful to U.S. producers?

 

Former Secretary Paulson has frequently raised the China Currency issue at Strategic Economic Dialogue meetings with Beijing , most recently last month, arguing for greater flexibility in the exchange rate. Yet the Treasury Department’s inability to classify China’s intervention in the valuation of its currency as “manipulation” has frustrated me and many of my colleagues who would like to see greater pressure put on China to allow its currency to appreciate more rapidly, according to market forces. Do you believe the Bush Administration’s policy of handling this issue through bilateral dialogue has worked satisfactorily, or would your recommend further actions be taken by the Obama Administration?

 

Finally, In July 2007 the Finance Committee—with my support—favorably reported the “Currency Exchange Rate Oversight Reform Act of 2007,” which would direct the Secretary of the Treasury to identify countries with “fundamentally misaligned” currencies (i.e., currencies that do not correspond to market conditions, whether or not due to deliberate foreign government manipulation), and impose gradually increasing restrictions on financial cooperation with such countries over the course of a year, possibly culminating in the U.S. bringing a formal dispute resolution case against an offending country in the World Trade Organization.

 

Are these legislative changes that you would recommend the President sign into law? Would you like to see different or additional authorities granted to the Treasury Department to deal with currency manipulation?

SECRETARY-DESIGNATE GEITHNER:  President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices. More broadly, we look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China’s growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home.

 

QUESTION:  Article IV of the IMF Charter, obligates each member nation; " to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustments or to gain an unfair competitive advantage over other members." The IMF has adopted surveillance provisions to guide member nations on how various IMF Articles will be interpreted. With regard to surveillance of Article IV, it defined currency manipulation as: “protracted large scale intervention in one direction in the exchange market.” Over the last few years China ' s global current account surplus has risen to over 11 per cent of its GDP, but it has maintained an undervalued currency by massively intervening in currency markets. What do you think of China ' s currency policies? And, more generally, what is the best approach to ensuring countries are not engaged in manipulating currency markets around the world?

SECRETARY-DESIGNATE GEITHNER:  President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices. While in the U.S. Senate he cosponsored, with Senator Stabenow, tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.
 
More generally, the best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

 

QUESTION:  Mr. Geithner, in the previous Administration, Secretary Paulson took a leading role in establishing and leading the Strategic Economic Dialogue with China. I supported that engagement with China , and hope that this Administration will continue to utilize the SED. However, the way the SED was managed sometimes blurred lines of responsibility within our federal government, and trade is one example of that. If confirmed, do you anticipate that the SED with China will be maintained? If so, do you anticipate that Treasury will be the lead agency for managing the SED? If so, do you anticipate interjecting Treasury in the management of portfolios such as trade that fall largely within the jurisdiction of other agencies?

 

SECRETARY-DESIGNATE GEITHNER:  The US China SED presents significant challenges but also opportunities. It is one of our most important relationships. There are many specific issues in our economic relationship that require our careful and prompt attention. These include currency issues, inadequate intellectual property rights protections, product safety, and non-tariff barriers. A deep engagement between our senior economic officials on these topics -- and on the issues of macroeconomic policy and financial stability, energy issues and the environment – to address differences and effectively resolve problems is a priority. Exactly what form that will take is something that we are considering.

 

QUESTION:  There is an ongoing to debate about whether and to what extent global economic imbalances contributed to our current financial and economic crisis. In particular, this debate focuses on the role of countries with large current account surpluses, such as China , in the current crisis. What is your view on the role and extent to which these imbalances contributed to our current economic problems? Based on this view, how will you as Treasury Secretary work to unwind these balances in an orderly fashion? If these imbalances are not unwound, what is the likely impact on the U.S. economy?

 

SECRETARY-DESIGNATE GEITHNER:  Global imbalances reflect a complex interaction of savings and investments and many other forces. In the short term we need coordinated stimulus to strengthen demand here and in China . Once demand is stabilized we need a constructive dialogue with China that focuses on helping China move towards growth that relies more on domestic consumption and less on exports.

FOR THE RECORD:

November 12, 2008
HP-1265

Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update
Global Challenge
Of course managing through this market turmoil while mitigating the impact of the credit crisis is a global as well as a national issue. We in the U.S. are well aware and humbled by our own failings and recognize our special responsibility to the global economy. The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions. These institutions found themselves with large holdings of structured products, including complex and opaque mortgage-backed securities. Some European institutions were characterized by high leverage, exposure to their own housing markets, exposure to Central European institutions, weak business models or overly aggressive expansion, while others faced weaknesses because of inadequate depositor protection systems. It should not be surprising that after 13 months of stress in the global capital markets, banks from the U.S. to the U.K. , from Germany to Iceland , from Russia to France , had difficulties that exposed some of these weaknesses for the first time. For some of these banks, this proved to be a hurdle too high and government action was necessary to support financial stability.

In that regard the G7 Finance Ministers meeting last month represented a major turning point in stabilizing the global financial system as the ministers came together to support a number of powerful strategies that were soon turned into effective actions in the United States and Europe . It is also clear that our first priority must be recovery and repair. And of course we must take strong actions to fix our system so that the world does not have to suffer something like this ever again. The Leaders summit President Bush will be hosting this weekend marks a very important step in what will be an ongoing process of recovery and reform.

And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us. Of course, it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries. And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.

But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.

If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.