Geithner to Seek China’s Support on Iran Sanctions While Pressing on Yuan

U.S. Treasury Secretary Timothy F. Geithner will urge Asia's two biggest economies to cut Iranian oil imports and seek to narrow differences with China on trade and currency disputes on a visit to Beijing and Tokyo this week.

Geithner arrives in Beijing today to meet with Chinese Vice Premier Wang Qishan and will hold talks with Premier Wen Jiabao, Vice President Xi Jinping and Vice Premier Li Keqiang tomorrow. In Japan, he is due to meet with Prime Minister Yoshihiko Noda and Finance Minister Jun Azumi on Jan. 12.

Geithner is likely to encounter resistance in China, which disagrees with U.S. assertions that its currency is undervalued and is sparring with the Obama administration over trade in goods from chicken to steel. At the same time, he may seek to avert any public split at a time when a likely European slide into recession is already clouding the global economic outlook.

“These are the world’s second- and third-largest economies and the two biggest holders of Treasury bills,” said Stephen Myrow, a U.S. Treasury official during the administration of George W. Bush and now managing director of ACG Analytics Inc., a Washington investment research firm. “These are relationships that need to be continually nurtured.”

A plea to cut back on Iranian oil, tied to the Obama administration’s sanctions last month aimed at that country’s nuclear program, may not resonate with Chinese officials, intelligence and foreign-affairs analysts said.

“China will be less OK with it than Japan,” Matthew Levitt, a former financial intelligence official at the Treasury Department who is now at the Washington Institute for Near East Policy, said in an interview. “But neither wants to be seen as rogue.”

The two countries are the largest importers of Iranian oil, with China accounting for 22 percent and Japan buying 14 percent of Tehran’s crude oil exports during the first half of last year, according to the U.S. Energy Information Administration. As a group, the European Union buys 18 percent of Iran’s oil exports.

Geithner may also tell Chinese officials that they need to follow through on pledges to shift the world’s second-largest economy more toward domestic demand and away from exports, William Cline, a senior fellow at the Peterson Institute for International Economics in Washington, said in an interview yesterday. The real value of the yuan “needs to rise by 10 to 20 percent,” he said.

The Treasury Department said Dec. 27 in its twice-yearly report on global currencies that the yuan is substantially undervalued and the U.S. will “press for policy changes that yield greater exchange-rate flexibility.” China’s state-run Xinhua News Agency replied in a commentary that the U.S. should move beyond the “useless, meaningless” quarrel over the exchange rate.

The yuan weakened yesterday 0.08 percent to 6.3146 per dollar as of 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System.

China’s growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. The central bank lowered the required reserve ratio for banks for the first time in almost three years in December to encourage lending, a shifting of its stance from fighting inflation as price pressures ease.

The Treasury secretary arrives in Japan as that nation copes with a fading rebound from the aftermath of a record earthquake in March 2011. Gross domestic product probably shrank 0.1 percent in the three months through December, the third contraction in four quarters, according to estimates by the Japan Center for Economic Research, an independent analysis group in Tokyo.

Prime Minister Noda’s administration has overseen record sales of yen (HOLDJN) to counter exchange-rate appreciation that has prompted companies including Nissan Motor Co. and Panasonic Corp. (6752) to plan shifting some operations abroad. The U.S. Treasury criticized the currency intervention in a report last month, saying Japan should instead focus on domestic policy initiatives.

“Geithner may be looking for input from America’s key trading partners in Asia on how to promote a sustainable recovery in world economic demand,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an e-mail. “He may want to hear directly as well in face-to- face meetings on just how worried are China and Japan officials about the outlook for their own domestic economies.”

Commerce may also be on the agenda. The U.S. Trade Representative asked the World Trade Organization last month to establish a panel that will seek a settlement in a conflict with China over duties on American poultry.

China set a duty of as much as 105.4 percent last year on U.S. broiler-chicken products. About 300,000 workers and farmers have been hurt by China’s actions, Trade Representative Ron Kirk said in September.

The chicken-import dispute may add to tensions between the world’s two largest economies, which have clashed over access to each others’ markets for products including steel pipes, tires, movies and music. The WTO rejected in September China’s appeal of a ruling that backed U.S. duties on Chinese tire imports.

Geithner hasn’t been to China since March 2011 and to Japan since November 2010. Treasury officials traveling with him include Lael Brainard, undersecretary for international affairs; Robert Dohner, deputy assistant secretary for Asia; and David Loevinger, senior coordinator for China affairs.

President Barack Obama signed into law Dec. 31 a defense- spending bill that includes a provision that would impose sanctions on foreign financial institutions that conduct transactions with the Central Bank of Iran.

The law gives the administration flexibility by allowing it to waive sanctions for up to 60 days at a time if the president determines they would threaten national security. Iran threatened last month to shut the Strait of Hormuz, a transit point for one-fifth of oil traded worldwide, if sanctions are imposed on its crude exports.

“The regular economic and trade relations and energy cooperation between China and Iran has nothing to do with the nuclear issue,” Chinese Vice Foreign Minister Cui Tiankai told reporters in Beijing yesterday. “We should not mix issues with different natures.”

Chinese officials aren’t “as committed to a unified position with the United States, don’t philosophically agree the sanctions should hurt the Iranian people or the Iranian economy, said Kenneth Katzman, an Iran specialist for the nonpartisan Congressional Research Service.

To contact the reporters on this story: Ian Katz in Washington at [email protected]; Cheyenne Hopkins at [email protected].

To contact the editors responsible for this story: Chris Wellisz at [email protected]