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Geithner urges China for more flexible exchange-rate
Published on: 2009-06-02
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BEIJING -- U.S. Treasury Secretary Timothy Geithner, in a speech here Monday, touched on a contentious subject, urging China to move toward a more flexible exchange-rate regime.

"Greater exchange-rate flexibility will ... encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future," Mr. Geithner said in a speech at Peking University, where he studied Chinese in the summer of 1981.

Allowing the yuan to rise would be an important sign that China is serious about boosting domestic demand, economists say. A stronger currency could hurt China's exporters but would also raise its buying power in international markets, encouraging imports.

"Strengthening domestic demand will strengthen China's ability to weather future fluctuations in global supply and demand," Mr. Geithner said.

Mr. Geithner raised hackles in January when he repeated campaign-trail assertions by President Barack Obama that China is "manipulating" its currency. He has since backed away from that language.

But encouraging more domestic demand in the long term won't solve the woes of China's exporters today. This year, the government has kept the yuan basically unchanged against the dollar. The State Council, China's cabinet, said last week the government would continue to aid exporters with measures such as improved financing and insurance. It repeated its usual commitment to keeping the exchange rate stable at a "reasonable and balanced level."

U.S. pressure on China to boost its domestic demand -- and, Washington hopes, buy more U.S. goods -- isn't new, but has taken on increased urgency as the damage from the financial crisis has left the world with fewer likely sources of growth. Mr. Geithner on Monday urged China to improve its health-care and social-security programs -- which could reduce households' need to save -- and move to more market-based interest rates and prices.

In January, China promised a $120 billion effort to give citizens better access to health care. The government has raised retirement benefits and welfare payments, and says it is committed to liberalizing energy prices.

Mr. Geithner stressed in his speech that a sustained global recovery depends on the efforts of both the U.S. and China to overhaul their economies. His focus on the mutual dependence of the two countries reinforces the shift in the U.S.-China relationship since the financial crisis.

Under his predecessor, Henry Paulson, U.S. complaints about trade and currency policy dominated the relationship. Recently, Chinese officials have often criticized U.S. regulatory failings and questioned whether its stimulus policies risk unleashing inflation.

Mr. Geithner's trip comes amid a rise in long-term interest rates and mounting fears about the U.S.'s ballooning borrowing needs. He said the U.S. must control a massive fiscal deficit and unwind market-rescue efforts when conditions improve.

Separately, in Washington, the Treasury named the World Bank's country director for China, David Dollar, economic emissary to China despite sharp criticism of his economic research.

Mr. Dollar co-authored studies that argued for the effectiveness of aid and the importance of tariff cuts in liberalizing economies and reducing poverty. But in 2006, a detailed review of World Bank research led by Princeton economist Angus Deaton called an aid paper "unconvincing" because of methodological problems.

The Bank defended Mr. Dollar's work and said it "stimulated a useful and ongoing debate." Mr. Dollar didn't respond to requests for comment.

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