Manipulators
So far, financial markets are watching from the sidelines, but the growing rhetoric between China and the U.S. on China's currency policy could start to spill out of the political arena and into market psychology.
"There's a sort of perfect storm brewing that's going to make this a bigger possible shock or risk event for markets," said David Gilmore, strategist with Foreign Exchange Analytics. "The Chinese are very defensive and there's a sort of maturing process happening in Beijing where they are no longer feeling uncomfortable assuming the world stage.
"I think we saw that in Sunday's speech from Premier Wen (Jiabao) when he was pretty firm about not letting his exchange rate appreciate. Then you have Congress trying to show it's doing a great job. What easier way to do that than blame the Chinese yuan for high levels of unemployment and unfair trade practices and rally everyone around an issue that everyone can agree with," said Gilmore. Wen Sunday rejected complaints about China's currency being undervalued, which critics say gives China an unfair trade advantage.
Congress ramped up its criticism of China this week, just as the latest NBC Wall Street Journal poll shows 77 percent of Americans disapprove of the job Congress is doing. A stunning 51 percent said they believe their own Congressional representatives should not be reelected and someone else should be given a chance. The poll also found that 48 percent of Americans believe that health-care reform is a bad idea. The House is expected to vote on the plan later this week.
On Monday, 130 members of Congress sent a letter to Treasury Secretary Tim Geithner asking the Obama Administration to label China a currency manipulator when it issues its regular report on currency manipulation next month. The House Ways and Means committee, meanwhile plans a hearing on China's currency policy next Wednesday.
A bipartisan bill was introduced in the Senate Tuesday by a group of Senators, including New York Democrat Charles Schumer and Republican Lindsey Graham. The bill contains elements of past failed legislative efforts and seeks to require the Treasury Department to identify which countries have currencies that are "misaligned" so the U.S. can place tarriffs on them.
"I think it would be very unfortunate in this environment for U.S. policy makers to undertake this effort at this time," said Sinche. "The world is still a delicate place economically. The amount of benefit that would actually come to the economy and the trade balance, relative to the potential damage this could bring in terms of the global economy, market confidence, cooperation..I just don''t think that's a good tradeoff."
China gets credit for being early to prop up the global economy with a swift injection of stimulus. Markets react nervously whenever it appears the Chinese will hold back or tighten, in order to contain the country's rapid economic growth.
"I just don't think you play politics with issues like this. I just think there are much bigger issues for cooperation. The trade deficit with China has come down substantially over the last year or so. The trade deficit with China is now running at an annual rate of about $38 billion a year less than it was at its peak. It's a meaningful decline," said Sinche.
Gilmore said the situation, if it continues to snowball, could put pressure on interest rates. "Maybe China will be less inclined to accumulate Treasurys, and I think there's already some evidence of that in the TIC data," he said. China was a net seller of Treasurys in December and January, though less so in January, according to Treasury data released Monday.
"It's not going to be helpful if China is viewing Treasurys with a bit of suspicion and disdain," he said. Gilmore said Wen's argument itself is weak in that the Chinese chose to tie their currency to the U.S. dollar, and neither side can afford for the relationship to deteriorate.
"I just don't see what policy makers will get from this. The notion that there could be confrontation, I think impacts equity markets. I think it impacts currency markets. I think it impacts growth expectations. So I'm just trying to figure out in what way anyone thinks this is good for the global economy, and why this would be a beneficial effort for U.S. companies and U.S. growth," Sinche said.
Rather than Geithner, Sinche said the Commerce Secretary Gary Locke would be a better choice to handle China trade diplomacy.
