Treasury Secretary-designate Tim Geithner was reported to have mentioned yesterday that he believes the Chinese are “manipulating” their currency, presumably downward against the dollar in an attempt to goose their exports.

This issue is going to get a lot of play in the next few months, because China’s mercantilist policy depends on an artificially undervalued currency. Since this causes tremendous imbalances in global capital flows, it’s long been US policy to encourage the Chinese to let their currency appreciate against ours.

And they came a long way, taking renminbi from about 7.5 to the dollar in late 2007, to the recent perceived target of 6.85. (The Chinese don’t let their currency float freely. Rather, the People’s Bank of China sets a narrow range in which it may float on any given day.)

China’s revaluation policy abruptly reversed last July as the global economy began to crumble. But it’s most important here to note Geithner’s use of the word “manipulation.” That’s a very special word, because the Treasury Secretary is required by law to report currency “manipulators” to Congress every six months, and may be required to take action against them.

The Chinese have retaliated swiftly to Geithner’s remarks. They let the yuan decline by 20 basis points overnight. And they caused a lot of minor banking officials to get quoted to the effect that, due to recessionary conditions in China, yuan would be considerably weaker yet, if the authorities weren’t holding it UP rather than down.

Paulson, who has been to China dozens of times and cultivated close relations with the power structure there as SecTreas, would never have allowed this to happen. I don’t know if Geithner and Obama are making a rookie mistake here, or if they’re signaling some misbegotten change in policy, or if they’re saying what they think the Senate wants to hear.

We don’t need a trade war with the people who are going to be lending us trillions of dollars over the next four years or more. If I can figure that out, you’d think The Smartest People In America™ wouldn’t have much trouble either.