China turned up the heat in its brewing trade war with the United States on Saturday. The central bank responded to accusations of currency manipulation by America's Treasury secretary-designate by calling him, diplomatically, a liar.
"These comments are not only out of keeping with the facts, even more so they are misleading in analyzing the causes of the financial crisis," Vice Governor Su Ning of the People's Bank of China said, according to a report from Reuters, which quoted the official Xinhua news agency.
Su's remarks were the central bank's first public response to the comments from U.S. Treasury Secretary-designate Timothy Geithner, who said this week in written comments for his Senate confirmation hearings that Beijing was manipulating its currency exchange policies to gain an unfair trade advantage. By keeping the yuan unnaturally weak, China would be aiding its exporters at the expense of American competitors, costing U.S. jobs at a time of rising unemployment.
"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner wrote.
Su suggested Geithner look closer to home to solve America's fiscal problems. "We believe that faced with the financial crisis there should be a spirit of self-criticism," Su said while visiting a business newspaper's office in Beijing, according to Xinhua.
"The international community is currently working together in actively responding to the financial crisis, and it must avoid exploiting different excuses for renewing or encouraging trade protectionism, because these are of no help in withstanding the financial crisis."
The issue is more than just words. Under U.S. law, formally labeling China a currency manipulator would require the Treasury to begin expedited negotiations with Beijing to reduce China's huge trade surplus with the United States and eliminate unfair currency advantages. While America is in recession and China is not, Beijing needs to spur its own economy to raise living standards or risk social upheaval, so it is unlikely to be interested in taking steps that would limit its own growth.
'China is going to be extremely unhappy, to say the least,' Tao Xie, a specialist t on Sino-U.S. relations at the Beijing Foreign Studies University. 'For administration officials, I do not think any one has ever pointed a finger so strongly at China.'
U.S. officials have long criticized China for keeping the yuan undervalued, Former President George W. Bush, however, avoided branding Beijing a currency manipulator, instead opting to urge it to adopt a more flexible exchange rate.
U.S. Treasury bonds suffered collateral damage from the war of words on Friday, with prices falling and interest rates rising. China has been a major purchaser of America's official debt in recent years, allowing the United States to run sizable budget and trade deficits. If it were to stop -- either to make a point or because the bond purchases do accomplish what many consider to be currency manipulation -- Geithner would likely find his Treasury paper having to offer higher yields to draw investors, putting new pressure on the American budget.
More bad news for bonds came late Friday, when Freddie Mac, the government-backed lender, said it will submit a request to the Treasury for an additional $30.0 billion to $35.0 billion of the $100.0 billion it can borrow. The additional money is a reflection of Freddie Mac's estimate of the operating losses and other items that will impact its fourth quarter. The company drew $13.8 billion in November. (See "Fed And Treasury To The Rescue. Again." )
Fearful investors pushed the yield on the 10-year note, which moves inversely from the price, traded at 2.62% on Friday, up from 2.59% on Thursday. The yield on the 30-year bond jumped to 3.36%, up from 3.26%.
Earlier this week, Xinhua quoted central bank figures showing that the growth of Beijing's currency reserves are slowing at a time when Washington needs the country to buy Treasuries more than ever in order to fund its stimulus spending. (See “China Not A Limitless Sponge For U.S. Debt.”) In the past few years, the ballooning of China's foreign-exchange reserves seemed a given.
Beijing had been allowing the yuan to gently appreciate against the dollar since July 2005. At the time, the dollar bought 8.2765 yuan, but it had fallen to 6.8380 late on Friday, little changed from Thursday.
Reuters contributed to this article.
Also see Yuan's Ebb Prompts U.S. Anxiety and China, New U.S. Administration Make Yuan First Row