From a Reuters interview with President Obama earlier in the week in anticipation of his trip to Asia, “Obama: strains unless US, China balance growth“:

[He] warned that the economic relationship between the two countries had become “deeply imbalanced” in recent decades, with a yawning trade gap and huge Chinese holdings of U.S. government debt.

Obama said he would be raising with Chinese leaders the sensitive issue of their yuan currency — which is seen by U.S. industry as significantly undervalued — as one factor contributing to the imbalances.

“As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,” he said. “They have a huge amount of U.S. dollars that they are holding, so our success is important to them.”

“The flipside of that is that if we don’t solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship.”

The Hill had a follow-up story, “Obama to China: Currency and trade imbalances a focal point,” with the NAM’s positive reaction.

I think it is significant he brought this up in an interview and it’s more than a passing comment,” said Pat Mears, who works on China issues for the National Association of Manufacturers. She said U.S. manufacturers don’t expect things to change overnight, but offered hope that China will again allow its currency to appreciate against the dollar, as it did for more than a year before the financial crisis hit in 2008.

And new stories on the cusp of his departure today.

• BBC News,”Obama leaves for Asia trade drive”
• The Associated Press, “Obama faces daunting challenges in Far East tour”
• Wall Street Journal, “An Agenda for Obama in China
• Asia Times Online, “China trade surplus shadows Obama visit“

It was important for Treasury Secretary-designate to flatly state that China is manipulating its currency. Everyone knows China’s currency is being held at an artificially low level, and it is necessary for the United States Government to acknowledge this in order to be able to approach the problem realistically. (See New York Times and WSJ stories.)

The next step is more difficult – how to get China’s currency appreciating again. The currency appreciated 21 percent against the dollar through July 2008 and then went flat as Chinese authorities decided they were concerned about China’s slipping export performance in the slowing world economy. The fact of the matter is that China’s continued currency manipulation is hurting their own economy and making their transition away from export-led growth more difficult. Yuan appreciation can be win-win.

The Treasury Secretary-Designate is properly concerned with China’s currency and as the next step needs to work within established international means to find a solution. During the campaign, then-candidate Obama saw the importance of a change in China’s currency practices and said he would use all the diplomatic avenues available to seek such a change. Certainly the International Monetary Fund can play a stronger role than it has in the past.

Geithner’s statements showed he wants to get China’s currency moving, but without precipitating a new global financial crisis. Global financial stability and further appreciation of China’s currency can and should go hand in hand, but all this needs to be done carefully and in a way calculated to achieve both objectives and contribute to a lessening of global imbalances.

The yuan per dollar graph below shows how China’s currency was moving until July 2008, and then was held flat.