Treasury Secretary Geithner's Trade Diplomacy in China

U.S. dollar and Chinese Yuan
U.S. dollar and Chinese Yuan

Treasury Secretary Timothy Geithner squeezed in a trip to Beijing on his way home from a visit to India. His mission: to diffuse ever-increasing U.S. trade tensions with China ahead of a meeting next week between the two countries' leaders. He may find his counterparts in the People's Republic in a mood to compromise.

According to most reports, the last thing the Chinese want right now is a dispute over whether they're keeping their currency, the yuan, artificially low. Famed short seller James Chanos and others are raising mounting concerns that the Chinese property market is in a bubble that's about to burst. Bloomberg News reports that Shanghai, China's wealthiest city, may impose a property tax. The central government has ordered local authorities to build low-cost housing for the poor, but like the U.S. before its economic collapse, many Chinese never contemplated a time when property values would decline.

"Last year China's banks issued $1.5 trillion (£932 bn) worth of new loans to help ease the country through the financial crisis," the BBC reports. "It is thought around a sixth of the total flowed into the property sector and there are some here who worry it is now overheating. "

Undervalued by 40%?

To make matters worse, local Chinese governments are in the midst of their own financial crisis. Victor Shih, a political science assistant professor at Northwestern University, tells PRI's The Worldthat many are now using property as collateral to amass trillions in debt for infrastructure projects. This is forcing them to sell property (technically the state still owns land in China), which may lead to private developers to bulldoze scores of homes, leaving many low-income residents nowhere to live.

The U.S. has accused the Chinese of keeping their currency artificially depressed for years. U.S. manufacturers estimate the yuan is undervalued by as much as 40%. Plenty of data back up these claims. In 2004, China had a trade imbalance with the U.S. of $162 billion. By 2008, it was at $226.8 billion, according to government statistics.

Others argue that a higher yuan may lead to higher prices for U.S. consumers as the country emerges from the worst economic crisis since the Great Depression. Last week, the Obama administration delayed releasing a report from the Treasury Department that could have officially labeled China as a currency manipulator, which in turn would have triggered all sorts of sanctions.

As NPR notes, "The delay of the Treasury report could be designed to avoid embarrassing the Chinese at a time the administration is enlisting their aid on sensitive issues of nuclear security and Iran's nuclear program."

Moreover, in today's globally integrated economy, trade wars benefit no one and harm everyone. Both the U.S. and China are eager to have a deal in place for China President Hu Jintao's visit April 12 to Washington. Otherwise, both countries are asking for trouble.