WASHINGTON -- President Barack Obama's nominee for Treasury secretary accused China on Thursday of "manipulating" its currency, a sharp rhetorical break from the Bush administration's approach to Beijing's controversial exchange-rate policy.
Timothy Geithner's use of the term signaled an escalation in the war of words -- if not necessarily of actions -- over Beijing's practice of keeping the yuan artificially weak against the dollar. Many U.S. manufacturers, unions and lawmakers charge that Beijing tinkers with its currency to give Chinese companies an edge over foreign competitors.
Responding to questions from the Senate Finance Committee overseeing his confirmation hearings, Mr. Geithner stressed Mr. Obama's promise to "use aggressively all diplomatic avenues open to him to seek change in China's currency practices."
Should Mr. Geithner win Senate confirmation, as the committee recommended, his choice of language will likely draw attention to Treasury's next report on international currency practices, due in April. U.S. trade law requires the report to identify any country that manipulates its exchange rate for purposes of gaining an advantage in international trade.
Such a designation would require the Treasury Department to open formal negotiations with Beijing over currency policy. Treasury officials frequently talk currency with their Chinese counterparts. The manipulator label would be a symbolic slap.
View Full Image Bloomberg News/Landov Timothy Geithner, U.S. Treasury Secretary nominee, testifies before the Senate Finance Committee.
While the Bush administration pressed Beijing to loosen its grip on the yuan, it consistently declined to brand China a currency manipulator. When he was in the Senate, Mr. Obama co-sponsored legislation to create new penalties "so countries like China cannot continue to get a free pass for undermining fair trade principles," in Mr. Geithner's words.
Mr. Geithner didn't say whether Mr. Obama would take a more punitive approach to China over its currency policy. He said the immediate priority is to persuade China to stimulate its domestic economy.
"You don't want to be the bull in the China shop when it comes to currencies right now," said Frank Vargo, a vice president of the National Association of Manufacturers, which has long lobbied against China's yuan policy. "But...we all know the Chinese currency is deliberately undervalued." A spokesman for the Chinese Embassy in Washington couldn't be reached for comment on Thursday afternoon.
President George W. Bush's Treasury secretary, Henry Paulson has cited the 21% appreciation of the yuan since July 2005 as evidence that China understands the need to liberalize the exchange-rate regime.
Write to Michael M. Phillips at michael.phillips@wsj.com
Printed in The Wall Street Journal, page A7
Timothy F. Geithner, Barack Obama's nominee for Secretary of the Treasury, had his confirmation hearing on Thursday in the United States Senate. If confirmed he will succeed Henry Paulson in this position, which is analogous to the finance minister in other nations.
Tim Geithner 
During Geithner's testimony in the Senate, he said that the Obama administration believes China is "manipulating" its currency. ''The New York Times'' says this suggests a confrontational stance toward China on trade issues.

"President Obama backed by the conclusions of a broad range of economists believes that China is manipulating its currency," Geithner said in his written responses to the Senate.

In his spoken response, Geithner said he would "use aggressively all diplomatic avenues open to him to seek change in China's currency practices."

"The signal this sends is not good for China-US relations", said Charles W. Freeman, a fellow at the Center for Strategic and International Studies and former head trade negotiator for China at the Office of the United States Trade Representative. "It opens a Pandora’s box. We need the Chinese to hold onto their Treasury and agency debt."

China "will be more than annoyed — they don’t like being singled out, and they don’t like countries explicitly criticizing them for the way they run their economy," said Nicholas Lardy of the Peterson Institute for International Economics.

Bloomberg L.P. said that US treasury securities dropped in value following Geithner's statements.

"It has to be done very carefully," said Frank Vargo, VP at the National Association of Manufacturers. "You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries. This needs to be done in a cooperative, not a confrontational, way."

"But...we all know the Chinese currency is deliberately undervalued," Vargo added.

Geithner was also questioned about taxes he failed to pay on income earned while working for the International Monetary Fund. However, this issue was largely forgiven by the senators.

Senator Orrin Hatch said he was certain Geithner was "a person of great integrity, even though he’s made these mistakes."

Senator John Cornyn said he was "willing to give Mr. Geithner the benefit of the doubt" on his tax mistakes.

Senator Jon Kyl was not as forgiving on the tax issue. "He Geithner has not been as candid with me or the committee as I think he should have been," Kyl said.

US law requires the Treasury to list countries that manipulate their currency. Former Secretary Paulson cited the 21% appreciation of the yuan since July 2005 as evidence that China was not manipulating the exchange rate, and kept China off the list.