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Diane Francis

Diane Francis

Posted: April 27, 2010 01:40 PM

Obama Games China

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The subtext going on with the G2 -- the United States and China -- is fun to watch as an example of the Obama team's nuanced global strategies.

Both President Obama and his Treasury Secretary Timothy Geithner spent a chunk of their childhoods in Asia, so they get the culture. Obama lived for years in Indonesia and Geithner in India.

The challenge is getting China to stop cheating by keeping its yuan artificially low. However, this also involves admitting that it has been happening.

But the concept of diu lian, or loss of face, is critical in order to get Asians to reverse course. So nothing has been direct.

This month, Obama and his Treasury Secretary are to release the results of a currency study, which likely reveals China's currency should be 27.5% higher. In U.S. law, they can immediately impose tariffs on everything from China.

That would spark a world trade war and a sell-off or diversion by China out of U.S. government bonds.

Sober second thought by Beijing

But signs are China is coming around in a face-saving way. The President and Treasury Secretary have left the criticisms about China mostly to others, such as Brazil this weekend or Congress, which is probably China's only de facto opposition party.

Earlier this month, Geithner flew to China's arch-rival India for a two-day love-in, which was duly noted in Beijing. He then dropped in on China on his way back.

China's President Hu Jintao then went to Obama's nuclear summit in Washington and, for the first time, hinted it will stop vetoing sanctions at the UN Security Council against Iran even though it's a big oil supplier to Beijing.

Next, Geithner announced a postponement of his currency report and said he will go to China in May for a two-country, high-level forum to solve the world's problems.

All this was preceded by "softening up" when Washington suddenly announced US$6-billion armaments deals to Taiwan and a meeting with Tibet's Dalai Lama.

It will be interesting to see if all this face-saving, indirect pressure will work. This is the most important economic issue in the world.

Last weekend, Geithner was mute on the yuan but said, "We have seen encouraging signs of a shift toward more rapid consumption growth that needs to be sustained and reinforced by a return to market-oriented exchange rates."

With Brazil and others joining the fray, it's likely the yuan will start its quiet climb in May or June.