What does U.S. gain in a yuan fight?

He could cave in to U.S. congressional calls to challenge China and anger a vital creditor as he seeks to boost American jobs in an election year. Or he could play it safe and duck the issue, following the example of his predecessor George W. Bush.

Analysts say they think Obama is still undecided and is listening to arguments from people who fear the geopolitical fallout, as well those who want the yuan to appreciate.

“If it was based on pure economics, they would have been labeled as a manipulator a long time ago,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, a Washington think tank.

Here are some questions and answers regarding the issue.

Will a Stronger Yuan Boost U.S. Jobs?

Economists say the yuan is at least 25 percent undervalued, which makes Chinese exports artificially cheap for foreign customers. This has helped its economy weather the global recession at the expense, critics argue, of jobs everywhere else in the world. But are these really U.S. jobs?

China is a low-wage, low-technology producer and competes with the likes of Mexico and India. The United States builds supremely complex things like airplanes and computers in competition with Germany and Japan, and the dollar has already depreciated nicely against their currencies. So those worried about taking a tough line with Beijing see no real jobs gain.

Those favoring action say getting China to move would free southeast Asian economies, which now hold their currencies in check to compete with China. They say this is a first step to opening such markets for American exports and rebuilding U.S. manufacturing.

Is Antagonizing America's Largest Creditor Worthwhile?

China holds US$889 billion worth of U.S government bonds and is the country's biggest lender, creating a potentially potent weapon if it decided to dump the holdings.

Chinese selling could push up U.S. bond yields and borrowing costs, hurting the economy and probably hitting the dollar. All are good reasons not to antagonize China while the U.S. recovery is still fragile. This is especially true of housing. The stability of government-controlled mortgage giants Fannie Mae and Freddie Mac plays a vital role in the availability of finance. China is a big holder of their debt.

Skeptics say the argument is an empty threat because China would shoot itself in the foot by selling Treasuries. It would inflict losses on its foreign reserves while weakening the dollar, directly defeating the object of Beijing's carefully maintained peg between its yuan and the U.S. currency.

Furthermore, U.S. investors increasingly have bought Treasuries since the recession began in December 2007 as domestic savings rates soared, reducing the country's reliance on funding from foreign creditors like China.

“The notion that China can threaten us with their large Treasury holdings is not serious,” said Robert Scott, director of international programs at the Washington-based Economic Policy Institute.

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