U.S. President Barack Obama said that while the United States saw China's recent announcement that it would increase the flexibility of its exchange rate as a positive sign, it will be crucial to see whether the currency appreciates by a significant amount. Obama stressed that he would defer to U.S. Treasury Secretary Timothy Geithner on whether the pace of the yuan's appreciation was appropriate to market fundamentals and the need to rebalance the U.S.-China trade relationship and global growth (possibly a reference to the pending U.S. Treasury Department report that could cite China for currency manipulation). Obama conceded that the United States did not expect a rapid, dramatic appreciation — referring to the extreme example of an immediate 20 percent rise — since that would be "disruptive" for foreign exchange markets and China's economy. Instead, he said the United States expects the yuan's trajectory to continue to rise in the coming months, with the timing and management handled by China as a "sovereign" issue. And while he reiterated that the undervalued yuan harms the U.S. economy, he said he was observing progress. These statements come amid the latest ramping up of debate about China's currency policy. They follow Beijing's recent declarations of a permanent shift from the de facto peg to the dollar that China had maintained since July 2008 as a way of shoring up trade during the global economic tumult. Though Obama's tone was optimistic on China's recent symbolic gesture, he echoed several top U.S. lawmakers — including the chairmen of the powerful House Ways and Means Committee and the Senate Finance Committee — who said this week that the exchange rate change would have to be "meaningful" if China is to avoid the passage of laws that would force the administration to take punitive trade actions. Beijing is attempting currency policy reform for its own purposes, but is taking an extremely gradual approach. It fears the impact of rising currency value on its export sector would combine with other problems, like rising labor costs and falling European demand as European governments enact austerity measures, resulting in an economically and socially destabilizing hit to its coastal manufacturing centers. Because of China's myriad worries about managing its economy, it may resist changes deep enough to satisfy Washington, where persistent high unemployment is putting pressure on the U.S. Congress to take action on China in the lead up to midterm U.S. elections in November 2010. The upcoming G-20 meeting in Canada, where Obama and Chinese President Hu Jintao will hold a bilateral meeting, and China's actions in the aftermath of the meeting will be critical in determining whether Washington will increase pressure on China or allow it more room to pursue its reforms cautiously. The pace and magnitude of yuan fluctuation affects China's internal stability, and its options are therefore limited. But Washington is also not unequivocally seeking to ignite a conflict with Beijing, given its own domestic and foreign policy troubles. Thus, significant concessions from China on currency — not to mention on other topics, such as protection of intellectual property, liberalized government procurement practices and controversial indigenous innovation industrial policy — could reduce the chances of the rift widening. Nevertheless, intentions are not the sole determiner of where the relationship will go, and there is ample room for distrust, differing perceptions and miscalculations to exacerbate the two states' deep economic disputes. In the long run, the United States cannot tolerate China's skirting of international exchange rate norms — but whether this difference leads to confrontation in the short term depends on whether China can make enough sacrifices to convince Washington to continue postponing its demands.