U.S. Treasury Secretary Tim Geithner in Sao Paulo on MondayPAULO WHITAKER
U.S. Treasury Secretary Timothy Geithner is working hard to widen the loose alliance of governments that have a vested interest in pressing China to take the shackles off its deliberately undervalued currency. Beijing and Washington have been engaged in an increasingly heated skirmish of words (it's still too small to be called a battle, let alone a war) over the Chinese yuan. The U.S. casts the Chinese policies as a leading villain behind the current surge of inflation in hotter emerging markets and its own sluggish rebound from the recession. China blames U.S fiscal and monetary policies for both problems. Mostly, it's been a lot of bluster, because neither side is eager to resort to heavier ammunition.
On Mr. Geithner's watch, the Treasury Department has tied itself in knots trying to avoid labelling China as a currency manipulator, a legal label that carries significant U.S. trade penalties. Instead, the Treasury's latest semi-annual review of China's currency practices calls the yuan "substantially undervalued" and says it is in China's own interests to change its practices. Chinese leaders will no doubt drop their jaws in surprise.
On Monday, Mr. Geithner took his case directly to one of those overheating emerging economies - Brazil - for the first time. In a speech to a business audience in Sao Paulo, he declared that the policies of certain other emerging markets were a key contributor to the real's rapid rise, Brazil's worsening imbalances and growing inflation problem.
"Investors around the world see Brazil growing at a faster pace and offering higher rates of return relative to other major economies," Mr. Geithner said. "But these flows have been magnified by the policies of other emerging economies that are trying to sustain undervalued currencies, with tightly controlled exchange-rate regimes." Emerging economies such as Brazil, which "maintain flexible exchange rates and open capital markets have borne a disproportionate share of both the benefits and burdens of these capital flows."
He didn't name names, but he really didn't have to. No one lives in fear over the inflation-exporting potential of a South Korea or Taiwan.
"As countries with large surpluses act to strengthen domestic demand in their economies, open their capital markets and allow their currencies to reflect fundamentals, we will see more balance in the flow of capital, less upward pressure on Brazil's currency, and more robust growth in Brazil's exports, especially manufacturing exports."
So is Brazil rushing to embrace the U.S. as a close ally in protecting its interests? Stranger things have happened. It was not so long ago - last September, to be precise - that Brazilian Finance Minister Guido Mantega was blaming both the U.S. and China for fomenting a global currency war that caught his poor innocent country in the middle of the crossfire. At the time, the real had gained about 25 per cent against a falling U.S. dollar in just nine months. A soaring currency jacked up the price of Brazilian exports and enabled cheaper imports to take a bigger bite out of the domestic market.
But Brazil has recently been more focused on Beijing's yuan policy, because of inflation pressures, the risk of asset bubbles and the pummelling being taken by domestic manufacturers, which simply can't compete with cheap imports from China. The U.S., as we know, is no longer much of a threat in this area. So now Brazil is getting a taste of what the U.S., Canada and Western Europe have been experiencing for years.