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China overtook Germany to become the world’s third-largest economy in 2007 after the Chinese authorities revised upwards the figures for growth during that year. China’s National Bureau of Statistics said on Wednesday that the economy expanded by 13% in 2007, a sharp increase from the 11.9% growth rate the authorities had previously stated.

Last week following US Treasury Secretary Tim Geithner’s public confirmation Secretary Geithner answered questions about currency and China, thus placing the Obama administration in the middle of the tension between the United States and the largest international buyer and holder of the USAs debt: China.

The written statement said; “President Obama believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”

“Manipulation?” “Aggressively?” This is strong language. Geithner did not do this on his own authority. These are prepared answers. He cited the new President, not once but twice.

China’s response was fast and direct. China’s commerce ministry said in Beijing that China “has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help U.S. protectionism and will not help towards a real solution to the issue.”

Are we seeing the world’s largest and third largest economies calling each other names in the middle of a global economic and financial meltdown? Why are we picking a fight with China? The implied question is why are we alluding to one with Japan, whose currency is currently the strongest of the G4 majors? In a world where global finance is mostly in US$s, British pounds, euros, and yen, this is engaging in a dangerous sport that could result in a trade war or a threat to global financial integration.

A Big Q at Davos is how does the Obama administration believe that launching a fight with China is beneficial?

There are those that are saying that the US is now treading in the realm of fiscal policy and national policy. This is not in the realm of the central bank; the Federal Reserve is not the player here. The Fed is doing all it can to unfreeze the financial system and restore it to functionality. If stymied or corrupted by conflicting policy in trade or federal finance, the recession will worsen and the pain will become more severe.

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