Mixed Messages

Chinese policymakers must be bemused, or at least confused. The current message from Washington:

US Secretary of State Hillary Clinton has pleaded with China to continue buying US Treasury bonds amid mounting fears that Washington may struggle to finance bank bail-outs and ballooning deficits over the next two years. "It's a safe investment. The United States has a well-deserved financial reputation," she told Chinese television stations at the end of her diplomatic tour of Asia.

The message one month ago:

President Barack Obama believes China is “manipulating” its currency, his choice to head the U.S. Treasury said on Thursday....Washington will “aggressively” use all its diplomatic tools to press Beijing to move faster on currency reform, New York Federal Reserve Bank President Timothy Geithner said ...U.S. Treasury bond prices fell on worries China could respond to Mr. Geithner’s frank comments by dumping U.S. Treasury bonds.

The inconsistency in the policy here becomes fully apparent only when one understands how China "manipulates" its currency: It keeps the value of the yuan lower than it otherwise might be by supplying yuan and demanding dollars in foreign-exchange markets. Those dollars are then invested in U.S. Treasuries.

In other words, Secretary Clinton is now asking the Chinese to do precisely what Secretary Geithner asked them not to do.