Geithner Confronts Curse of 15 Plaguing China: William Pesek
Commentary by William Pesek
April 12 (Bloomberg) -- Chinese numerology is a fascinating thing.
Take the obsession with eight. China chose August 8, 2008, for the start of the Beijing Olympics. What date could be luckier than 08/08/08? Weddings are planned around eights. Chinese pay extra for eights in phones numbers and license plates. Businesses seek offices with eights in the address.
Four is perhaps the most dubious of numbers. That, coincidentally, was how many U.S. bigwigs were in China last week. Treasury Secretary Timothy Geithner was on the job. Also there for various reasons were former President George W. Bush and former Treasury chiefs Henry Paulson and John Snow. Chinese bloggers buzzed about the unluckiness of it all.
Let’s consider an even less auspicious number: 15. While it’s not known to spook the average Chinese, 15 keeps cropping up in ways that should worry those who sense China is losing control over inflation.
Last year, China began pouring 15 trillion yuan ($2.2 trillion) into projects -- mostly at the local government level -- to boost growth. All that building has some analysts predicting stock-price gains of 15 percent for Xinjiang Tianshan Cement Co. Also, 15 percent is the low end of the range of estimates for how much the yuan is undervalued.
15% Inflation?
That leads us to the most worrying 15 of all. Failure to rein in local-government spending may push inflation to 15 percent by 2012, says Victor Shih, an economist at Northwestern University in Evanston, Illinois. He has received lots of attention for tallying government borrowing.
This appears to be Geithner’s new line with Chinese officials. Not trade deficits, lost U.S. jobs or fairness between nations. The bill from China’s massive stimulus is coming due and the hangover will be severe. A stronger yuan would limit the pain.
Here, 15 pops up again. April 15 was the deadline for a semiannual U.S. review of the currency policies of major trading partners. That was until Geithner postponed it. Rather than take the bait from Congress to label China a currency manipulator, Geithner jetted to Beijing for an unscheduled chat with Vice Premier Wang Qishan last week.
The U.S. is right to take a less confrontational tone. There’s zero chance China will bow to table-thumping -- not when its economy is growing at 10.7 percent and the U.S.’s is expanding at 0.1 percent. China should boost the yuan for its own good. Traders are betting such a move is now afoot.
Real Manipulator
Geithner’s reticence underscores an inconvenient reality. Everyone knows China manipulates the yuan. It wouldn’t be adding to its $2.4 trillion of currency reserves if it weren’t married to a mercantilist model. Yet China could hold up a mirror to the U.S.
When U.S. Senators Charles Schumer of New York and Lindsey Graham of South Carolina berate China, they forget their government also is a massive manipulator. Zero interest rates and trillions of dollars of government debt tend to depress a currency over time.
The only reason the dollar isn’t plunging is Chinese support and the fact investors don’t have many alternatives. U.S. policies have a clear beggar-thy-neighbor quality. It’s not China’s fault if it plays the game better.
In a perfect world, Geithner could push the issue by buying mountains of yuan. After all, the U.S. only has $44 billion of reserves, which is about how much China spent staging the Beijing Olympics. Yet loading up on yuan to boost China’s exchange rate isn’t an option until the currency is fully convertible.
‘It’ Economy
How China figures all this out is of vital interest to markets and politicians the world over.
China has been the “It” economy for years. What’s dawning on the world, though, is how many challenges are linked to its development. Be it global imbalances, climate change, the optimal style of government or the role of human rights in diplomacy, China is at the center of the debate.
The global crisis devastated the “Washington Consensus” of democracy, free markets, transparency and unfettered globalization. It’s now competing with a “Beijing Consensus” of open markets, autocratic government and limited press freedom. Anyone who thinks this tug of war between the Group of Two will go smoothly is dreaming.
Geithner is putting the Group of 20 to the test as he tries to prod China to revalue. Seven months ago, the G-20 replaced the Group of Seven as the steering committee to rebalance world growth. The idea was to broaden the power base. Instead, it has grown smaller. The G-20 is taking a backseat to the G-2.
It’s a marriage of inconvenience. As the U.S. struggles to increase jobs, China risks overheating as it grapples with the Curse of 15. It was on Dec. 15 that New York hedge-fund manager James Chanos made headlines in a CNBC interview about shorting China’s economy. He’s hardly alone in betting on when China’s 15 minutes of economic fame might be up.
We’ll get a fresh idea when China unveils its first-quarter growth numbers on -- yes, you guessed it -- the 15th of April.
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