Treasury Secretary Timothy Geithner makes it pretty clear how he thinks the next few months will unfold with respect to China's exchange rate policy:
I have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15. There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time....
China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.
Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months.
In layman's terms, the Obama administration has decided that it will rely on multilateral pressure to get China to change its policy rather than take the unilateral route -- for now. In blog terms, the administration rejected the Krugman/Bergsten/Schumer approach to pressuring China in return for... well... my preferred approach.
Which automatically makes me nervous, of course, because I could easily be wrong. Still, there have been signs that other members of the G-20 feel the same way as the United States. And it's also true that the hour-long conversation between President Obama and President Hu seems to smoothed over a lot of recent contretemps. Indeed, Nicholas Lardy told the New York Times that on Iran and North Kotrea the U.S. was getting a fair amount in return for deferring the report.
A few Chinese central bankers and think-tankers are now making noise about movements on exchange rates. Making this shift via G-20 and bilateral channels -- rather than in response to a Treasury finding of currency manipulation or Congressional threats of protectionism -- gives China a more politically palatable justification for policy change. Beijing will likely move in the right direction, albeit more slowly than anyone else would like.
And, if nothing happens from these meetings, China can be named in the fall. Indeed, the paradox of two-level games is that there needs to a rising but manageable possibility of protectionist action by the United States to give China an incentive to alter their policy.
In many ways, this is put-up-or-shut-up time for the G-20. If the U.S. has no option but to name China, it starkly demonstrates the limits of the G-20 process at forcing policy coordination. If, on the other hand, China pursues a more accomodationist approach, then that augments the G-20's prestige as a useful forum.
UPDATE: Simon Lester has a round-up of reactions.