China and U.S. in Currency Spat

A war of words is flaring between China and the United States that could leave both sides losers. Tim Geithner, the new Treasury secretary, accused China last week of manipulating its currency. At Davos, Premier Wen Jiabao of China hit back at the profligate habits and lax regulation of “some countries.” Both are right. But each side would do better to acknowledge its own mistakes.

China’s critics say that letting the yuan rise only in small steps distorts trade, makes United States manufacturers uncompetitive and contributes to the trade deficit. That’s less of a problem than it used to be: imports from China fell a record $5.7 billion, or 17 percent, in November, according to the latest data, as consumers cut spending. But a weak yuan has made Chinese exports too cheap for too long, even though American consumers have been happy to enjoy the fruits.

Washington can’t force China to revalue, and there’s no sign it’s thinking of rash retaliatory measures like import duties. But Mr. Geithner’s rhetoric is nonetheless tactless and risks fanning protectionism in Congress. Recent interventionist policies, like loans to carmakers and support for banks, have already compromised the principles of free trade. A creeping halt to global trade could easily turn a recession into a slump.

Moreover, calls for China to unhook its currency ignore the co-dependency of the two nations. To maintain its exchange rate, China’s central bank buys huge slabs of dollar-denominated assets, so it can match its yuan to the right number of dollars. That means the Treasury doesn’t have to juice up yields on its paper to attract other buyers. China is already buying fewer Treasury bonds than it was, but speeding the process would raise the cost of issuing new debt.

Ultimately a revaluation of the yuan is likely, maybe as much as 40 percent, by some estimates. It is pie in the sky, of course, to think China will rush into such a shift when growth already lags 8 percent. A rapid change would harm both sides. But in the long run, a stronger currency would help turn China from the world’s sweatshop into a stable, consumption-led economy and take away a big driver of United States consumers’ profligacy. Both sides should work constructively to achieve that end, and leave the rhetorical swordplay alone.

The Real Winners

It’s now clear that 2008 Wall Street bonuses have been cut at least in half. Outsiders remain aghast that bonuses have been paid at all. But that isn’t the only shocker. In this supposedly most meritocratic of industries, staff at the worst-performing institutions have absorbed the least pain.

Take a look around. A Goldman Sachs partner who earned $2 million in 2007 would have made about $500,000 for 2008. The cuts will not have been as harsh for the next layer down, and Goldman eased the sting in any case by allowing previously earned restricted shares to be sold more quickly.

At JPMorgan, the $2 million bonus of a year ago would have shrunk to around $1 million. Of course, about 40 percent of the sum was paid in options that have not fared as well as the stock component that Goldman bankers received. JPMorgan shares are down 22 percent so far this year, while Goldman’s have held steady since compensation shares were priced in late December.

The real winners were survivors of banks relegated to the history books. Brokers from Bear Stearns were retained by JPMorgan on boom-time packages. Similar deals were struck by the sales and trading standouts from Lehman Brothers who were hired by Barclays in the United States. The beds of Lehman’s top brass in Europe and Asia were feathered by Nomura with two years of bonuses, mostly in cash and at 2007 levels.

These retention packages were made when the threat of competitive hiring seemed distant. But the industry’s pay culture — which dictates that bankers need big checks to work for new masters — still prevailed. Some firms already have vowed to reform their compensation schemes. With individuals from reckless firms doing so well in a year like 2008, shareholders should light a fire under those efforts.