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Misreading China’s Intentions on Currency Re-valuation

About the value of China’s currency: we all know it’s undervalued. The Chinese know it’s undervalued. They can see it in consumer-price inflation, which is now up between 2 and 3 percent after being subdued for much of 2009. They can see it in a 15% jump in housing prices in some cities. And they can see it in the growing concern among ordinary Chinese about the falling real value of their savings and their ability to keep up their headlong dash to prosperity.

For all the talk about China powering a global recovery on a flood of government-driven investment, Chinese authorities have been steadily preparing the country for some tightening in bank lending and monetary conditions. They overstimulated, and they have to get this inflation under control. People are even starting to mutter darkly about a Chinese financial crisis caused by terrible credit quality among the (rampantly corrupt) local government authorities who borrow heavily against land to finance investment, using the central government’s credit.

Against this backdrop, we had one of the mainstream media’s patented story clusters this past week, complete with heavily-publicized statements by favored pundits, innocently timed to coincide with statements by policymakers. Of course, none of this ever happens by design, since we all know the media are objective and only report what they see. PR has nothing to do with it.

It started with Paul Krugman, a man who wields more power outside the Administration (and is able to indulge his weakness for sniping at those in power) than he could from inside. Hearstlike, he just declared war on China’s currency undervaluation from his perch in Princeton, calling for up to a 25% tariff on Chinese imports until they learn their lesson and revalue their money.

Senator Chuck Schumer has been wailing about something like this for years. He and Lindsey Graham would love to put on a little protectionism. The labor unions which underwrite the Democratic Party are all over this too. And a variety of other comments appeared after Krugman’s broadside about the fact that we have the Chinese over a barrel, rather than the other way around, and it’s time to start acting like it.

And there’s a very great deal to that. A lot of people have become fearful that economic power has shifted too far to the East. This is a dangerous over-reading of the true situation. The US, especially with our current indecisive and divided government, often seems paralyzed with fear. But with one fourth the population, we still have an economy three times bigger than China’s, and we’re still their most important market.

So why shouldn’t we start a trade war against them? Because they’re not stupid. They know very well that they have to re-value renminbi, and they’ve carefully “socialized” the idea of perhaps a rise to about 6.50 against the dollar, from the current 6.83.

But the one thing the Chinese authorities simply can not do is appear to be bowing to pressure from the US on the issue. You can’t have missed the anger from Premier Wen Jiabao this weekend, in very unusual remarks which pointedly admonished the US and the rest of the world for criticizing his currency policy. This happened just as Krugman was sensing a soft target and deciding to take his shot.

Wen was forced to say (mendaciously) that China’s currency isn’t undervalued at all, and that policy there was ticking along just fine. Rather, he said, it’s the US that is screwing everything up with huge fiscal deficits that threaten to reduce the value of China’s foreign-exchange reserves. (There’s plenty of truth to that, too.) And he went out of his way to call Obama out for snubbing him at the Copenhagen climate summit last December. Everyone else at the time felt that Wen chapped Obama by sending a low-level official to negotiate with him.

As unusual as it was for Wen to show outward anger, he must have been boiling mad inside. The Chinese leadership are insecure in their position. By having such a poor understanding of the internal dynamics of Chinese power, we’ve set back their currency revaluation for maybe 60 or 90 days. Now it’s time for people like Paul Krugman, Chuck Schumer, the editorial page of the New York Times, the Congresscritters howling for Geithner to find that China is a “currency manipulator,” and Barack Obama to shut their pieholes.

China will revalue, but only if their leadership can portray the move as having been determined by themselves, without any foreign pressure. By trying to force the issue, we’ve pushed it back instead.

This story originally appeared at The New Ledger.

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