MEETING HINTS AT DEAL ON CURRENCY

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Charles Schumer, US senator from the state of New York, is threatening legislation to punish China for manipulating its currency. Tim Geithner, the Treasury secretary, is counselling caution and diplomacy. The White House is concerned about managing its wider relationship with Beijing.

It is all beginning to look somewhat like 2005, when the Treasury secretary was John Snow and George W. Bush was president. Back then, Mr Snow's repeated insistence that a move towards a flexible exchange rate was imminent was vindicated in July when the renminbi undertook a small revaluation and was then permitted to crawl slowly higher within a trading band.

The recent apparent rapprochement between the US and Chinese administrations, underlined by Mr Geithner's surprise meeting with Wang Qishan, China's vice-premier, later this week, suggests a repeat move in the next few months.

Recently US anger over the exchange rate has been matched by Chinese officials lambasting the US administration over arms sales to Taiwan, a meeting with the Dalai Lama, Tibet's spiritual leader, and Google's decision to pull out of China.

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But a series of conciliatory steps by both sides in the past week have been read by many in Beijing as part of a wider deal to get bilateral relations back on track after months of harsh rhetoric.

“Clearly a grand bargain is under negotiation and both sides are starting to co-operate on a range of issues,” according to Xiao Geng, director of the Brookings-Tsinghua Public Policy Center in Beijing.

Yet two elements of the current situation are new. First is the new prominence of the G20 grouping of leading governments that brings the US and China together. Second is the possibility that, having seen little impact from the previous exchange rate flexibility, some in the US Congress may be in less of a mood to accept anything but a dramatic change.

Expert opinion is largely on the side of the US administration's diplomatic efforts. Eswar Prasad at Cornell University, formerly head of the International Monetary Fund's China division, says: “Geithner has made a very savvy move, deflecting pressure from China and allowing both sides time to address the concerns of their domestic constituencies”.

He adds that tension will be further defused by two serendipitous events: better-than-expected US employment figures and China slipping into trade deficit in March – both of which should somewhat undermine the argument that the Chinese are stealing US jobs.

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Moreover, if the US manages to bring the currency issue before the G20, whose heads of government meet in June, it could allow Beijing to portray the move as fulfilling its multilateral responsibilities.

Dan Price, senior partner at the law firm Sidley Austin and a senior White House official in the Bush administration, says: “Secretary Geithner is entirely correct to reframe the currency issue as a multilateral concern to be addressed through the G20 rather than a bilateral US-China issue that tends to fall prey to heated rhetoric on both sides.”

Yet the reaction of Congress is likely to depend on how big the currency move is. Back in 2005 Mr Snow persuaded Mr Schumer to put on hold a bill that would have imposed currency tariffs on China even before Beijing announced its move. Yesterday Mr Schumer expressed deep scepticism that talking to the Chinese rather than actually legislating would do any good. He has spent much of the congressional Easter recess touring beleaguered steel plants and manufacturing companies in upstate New York.

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Analysts think it is highly unlikely that Mr Schumer will get a bill through Congress by his end of May target, not least because Sander Levin, chairman of the influential House of Representatives ways and means committee, has been sounding much more cautious.

But if any exchange rate change is similar to the modest 2005 move, which appeared to make little difference to the US's bilateral trade deficit with China, the congressional pressure for action could be renewed.

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Chris Nelson, editor of a widely-read Asia newsletter, says that some amount of heated rhetoric from Capitol Hill is actually useful to the administration in extracting concessions from China. Whether it will amount to more than words depends on the bellwether members of Congress such as Mr Levin than Mr Schumer. “Schumer is by definition not satisfiable,” Mr Nelson says. “He used the currency issue in 2005 to make himself a player in the Senate and is doing so again. But the Schumer bill could prove to be a useful tool to Obama.”

The 2005 currency tensions were dissipated without open conflict.

The 2010 version looks more hopeful than it did last week, but there remains a long way to go.