China Currency Call A Red Herring

Timothy Geithner seems to suffer from China syndrome. In January, the Treasury Secretary offended Beijing with accusations of currency manipulation. Wednesday, he caused a brief dollar selloff by failing to dismiss radical proposals from China's central-bank governor regarding a new global reserve currency. Mr. Geithner later clarified his remarks, emphasizing his continued fandom of the greenback.

Fittingly, therefore, rhetoric was met with rhetoric. Reserve currencies are begotten, not made. The dollar's pre-eminence, like sterling's before it, stems from a range of factors including deep capital markets and military power. A cooked-up replacement would be the monetary equivalent of Esperanto -- an artificial curio. Beijing's proposal, therefore, looks more like a shot across Washington's bow, reflecting concern about the impact of U.S. profligacy.

China's options look limited, however. U.S. Treasurys constitute arguably the only market deep enough for China to invest its surpluses without causing huge distortion or unleashing rampant protectionism. Dumping Treasurys to punish Washington would trash the value of Beijing's own reserves -- and cause upheaval in the U.S., still the buyer of last resort for China's exports.

Faced with such symbiosis, it is understandable that Beijing keeps jawboning Washington to show some fiscal restraint, even if the response is less than concrete.