It seems to me that if you read the latest developments on the Chinese currency issue, that all the pieces are falling into place for a successful resolution of the issue. Tim Geithner will meet with vice prime minister Wang Qishan on Thursday and tell him that he’s under increasing political pressure at home to declare China an official currency manipulator. Chinese officials will tell Geithner they understand that his wiggle-room is running out and they’re prepared to revalue, but it has to be portrayed as their own decision undertaken for their own interests. Everyone will shake hands and make vague remarks to the press, and after a “decent interval” the change will happen.
The odd thing about this is that if it does end that way this will be a story in which everyone is right. The Obama administration’s refusal to loudly denounce China or threaten them with retaliation will be vindicated. But so will the loud denunciations of the Obama administration! After all, Obama’s team being able to point to growing domestic pressure is what makes the behind-the-scenes talks work.