The United States dodged a battle this week when Treasury Secretary Timothy Geithner announced a delay in the publication of an April 15 report to Congress that could have named China a currency manipulator in violation of U.S. trade and exchange rate policies. Now, he's off to China to meet with Vice Prime Minister Wang Qishan in Beijing, a meeting that could have palpable consequences for American investors.
What's at issue is China's refusal to revalue its currency, the renminbi, which remains pegged at a nearly fixed exchange rate of about 6.827 to the dollar. If the renminbi traded freely, it would be anywhere from 20% to 40% higher, currency watchers say. However, as it stands, the artificially lower currency keeps Chinese imports cheap here and makes American goods expensive in China. The net result is a widening trade gap that frustrates the White House and hobbles Main Street.
Recent economic data suggest the domestic recovery is progressing but remains fragile. U.S. stocks are up about 5% for the year to date, jobs were added to the economy for the first time in three years and the gears of the business cycle are starting to engage. However, a protracted, public tiff with our second-largest trading partner would effectively torpedo the still-precarious recovery, says Nicholas Lardy, a senior fellow at the Peter G. Peterson Institute for International Economics.
"If we had named China a manipulator, they would have undoubtedly found some way to retaliate," he says. "Geithner is giving them a nice big window to resolve international debates on this issue. He's not someone who believes that charging China with manipulation would force them to do something about their currency."
Some say the U.S. would do well by letting China continue to wrestle with the currency issue on its own. Bill Witherell, chief global economist at Cumberland Advisors, predicts the U.S. will allow some Chinese domestic political debates to progress because any success by an increasingly vocal faction in Beijing that sees a need for the renminbi to appreciate could benefit the U.S. economy. "Policymakers in China are giving indications that they are close to deciding to permit some appreciation in their currency," he wrote Tuesday. "China would loathe appearing to be responding to bilateral pressure. They would be much more likely to participate in a multilateral move to reduce global imbalances."
That stance could help U.S. investors because it allows the business cycle to progress at an unfettered pace, says Joanne Thornton, a policy analyst at Concept Capital. She points to pending deals, such as Hewlett-Packard’s (HPQ) purchase of 3Com (COMS), partially owned by Chinese conglomerate Huawei. Huawei, in turn, is discussing deals with U.S. technology firms, and a currency spat would be harmful, she says.
"The biggest implication of [backing off the manipulator tag] is that it would reduce the political risk of a real clash that could cause a crisis, or result in legislation that impedes trade and capital flows," she says. "That would real trouble for U.S. multinationals operating in China and the Asia-Pacific region."
It would also hit Chinese stock prices, which have already been affected by the People’s Bank of China’s tightening policy, says Witherell. He likes the Claymore/AlphaShares China Small Cap (HAO) exchange-traded fund, which advanced 5.07% in the first quarter. He says it isn’t as concentrated in Chinese financial stocks, and thus has a one-year total return of 95%, significantly higher than the 52% total return for the better known iShares FTSE/Xinhua China 25 Index fund (FXI).
Citigroup's chief U.S. equity strategist, Tobias Levkovich, says a scuffle with China is among several threats to economic stability that could trigger some market turbulence. "The combination of the Fed removing its 'extended period' terminology, a possibly 'hung parliament' in the U.K., a growing emphasis on 2011 prospects as the calendar shifts toward the second half of 2010, political uncertainty looking toward the midterm elections, the plausibility of increased trade friction with China and the likelihood of higher interest rates associated with economic recovery all could cause a meaningful pullback in the S&P 500," he warned. "Each factor individually may not be the driver but the confluence of several items might, as was the case in January."
Geithner's softer style of economic diplomacy could offer a measure of stability – and steadier market performance – to American investors, says Witherell.
"I think they're moving in the right direction and I suspect that our bilateral talks are -- on both sides -- fairly encouraging," he said. "Like it or not, we really are partners in dealing with the global economy."
Trackback URL for this story: http://www.smartmoney.com/tb/Jdin.2B9A.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
Read Full Article »