It could be time for China to back down

China may be preparing to battle for economic dominance with the US.

By , Guest blogger

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    A laborer carries branches at a timber processing factory in Huaibei, Anhui province March 15, 2010. China's economy is likely to expand more than 9 percent this year, thanks to pro-growth policies and an improving global environment, a government researcher said in remarks published on Monday.
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Throughout the media, mainstream and otherwise, and especially since the financial crisis, are discussions of China’s growing importance… be it in new billionaires or in strengthening political allies. However, Ambrose Evans-Pritchard takes a different tack. When it comes to the current issue of Chinese yuan appreciation in particular, he questions whether China’s aggressive ire may have risen a little too far too fast.

From The Telegraph:

“China’s premier Wen Jiabao is defiant.

“‘I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency,’ he said yesterday. Once again he demanded that the US takes ‘concrete steps to reassure investors’ over the safety of US assets…

“…Days earlier the State Council accused America of serial villainy. ‘In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers’ rights are seriously violated,’ it said.

“‘The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights,’ it said.

“‘At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries.’ And so forth.

“Is the Politburo smoking weed?”

The problem, as Evans-Pritchard explains, is that Beijing’s above approach to the problem is overly one-sided. China fails to acknowledge its own role in global trade imbalances and, as a result, ends up looking a bit out of touch with reality.

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Another important point he brings up is the tarnish that could finally be forming on China’s otherwise lustrous wealth of foreign reserves…

Michael Pettis from Beijing University argues that China’s reserves of $2.4 trillion – arguably $3 trillion – are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

“The reserves cannot be used internally to support China’s economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China’s dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities.”

Interestingly, here is an insistence that China accept the same set of rules that other world economic powers have chosen to adopt. Yet, it clearly hasn’t accepted other generally accepted practices… democracy for example… and it seems to be doing alright.

It may not benefit China to adjust itself according to Western realities, a route Japan seemed to take. Perhaps it would be better off championing a new economic strategy it envisions as potentially more successful in the global economy of the future. That said, as hard as it is to know what motivates US politicians, it’s even tougher to guess what the Chinese leadership may have in mind.

Are lines being drawn in the sand? Is it the Western way or the highway? Evans-Pritchard seems decided on the outcome, writing “a clash would not be ‘mutual assured destruction’, as often claimed. Washington would win.” It sounds awfully reassuring to hear, but it’s unlikely we can be so sure.

This has all the makings of a must-read article, and you can have a look for yourself at The Telegraph’s coverage of how China’s Politburo may be spoiling for a showdown with America.

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