Geithner Labels China's Undervalued Currency As Unsustainable

By Mario Trujillo

The undervalued exchange rate of Chinese currency has made Chinese companies more competitive at home but is untenable over the long term, Treasury Secretary Timothy Geithner said Wednesday.

“If China does not allow the currency to appreciate more rapidly, it will run the risk of seeing domestic inflation accelerate, as you are already seeing, and will face greater risk of a damaging rise in asset prices, both of which will threaten future growth,” Geithner said

His speech at the John’s Hopkins Institute of Policy Studies comes just one week before President Obama is scheduled to meet with Chinese President Hu Jintao at the White House.

At this point, much of China’s economic growth is related to exports outside the country, Geithner said. A key objective of the U.S. is to get China to focus more on domestic consumption, which will help U.S. companies based in China to stay competitive.

China’s deflated currency is partly standing in the way. The undervalued exchange rate makes it harder for foreign companies based in China, including the U.S., to grow when exchanging currency back home. While Geithner said it is ultimately beneficial for China to correctly value its currency, the U.S. will use international trade laws as leverage when possible.

Progress on this front is coming slowly, Geithner said. China has allowed its currency to appreciate by about 3 percent against the U.S. dollar since July 2010. But Geithner said it is not a matter of if the exchange rate will balance out but a matter of how it happens.