Today the Chinese are staging rowdy protests against Japan. Will they do so against the United States soon? They will certainly have cause to, since our pressuring China to revalue the yuan is a tad more recent than the rape of Nanking and what a few Japanese textbooks do not say about it. FT on the G7:
[M]inisters from all the countries apart from Japan backed a US demand that China should act immediately. John Snow, US treasury secretary said after the G7 meeting that China has had long enough to prepare its financial system, and more than two years of engagement with the US and the rest of the G7 on currency reform. “With this groundwork in place, China is ready now to adopt a more flexible exchange rate,” he said. One senior official from a G7 country said: “It’s not a question of threatening China but of recognising that this is getting urgent.”
Greater currency flexibility is seen by the G7 as necessary to encourage other Asian developing countries to let their currencies rise against the dollar and promote domestic-led growth. The US call was backed up by the finance ministers from Germany, France and Canada, speaking in the sidelines of the weekend meetings.
Mr Snow said the G7 had “put a clock” on the required actions by countries to help reduce global imbalances, including reducing the US budget deficit and promoting faster growth in Japan and Europe. That progress would be reviewed in an audit at the annual meetings of the International Monetary Fund and World Bank in September, he said. The US expects action from China within that timeframe.
We have discussed the serious imbalances in the Chinese economy in this space in the past several weeks — huge bad debts — over $400 billion — in the banks, widespread government corruption, 1920’s-America levels of concentration of wealth, speculative bubbles in some asset categories, pressure from the EU to curb textile exports, etc. Added to that in the past two weeks have been imbalances in the political sphere, namely the intensely felt anti-Japanese protests abetted by the government. The confluence of nettlesome issues from the economic and political sides is deeply troubling.
China has exercised poor judgment in dealing with some of the excesses generated by growth, notably by failing to curb official corruption and by apparently condoning unsound banking practices. The government’s assistance with the anti-Japan protests has been another blunder. Should China fail to respond to the G7’s calls for floating the yuan, it is obvious that retaliatory measures are possible, such as the ill-advised tariff threats in the Schumer-Graham legislation recently passed by the Senate.
We continue to reflect upon troubling similarities between China in the Aught’s and the USA in the Roaring 20’s. Rapid industrialization, extension of questionable credit, speculative bubbles, vast wealth disparity between the cities and the countryside, looming questions of tariff protection, etc. Of course there are vast differences as well: Chinese financial leverage appears to be quite a bit lower than the US’s then, Chinese stock market values are low, China has $600 billion in foreign currency reserves, and the world now knows how to deal with credit crunches and panics so they don’t replicate the vicious cycle that started in 1929 with the Crash. Nonetheless, care and reason need to be judiciously applied during this period — the yuan needs to float and Schumer and Graham need to make sure they are not remembered as today’s Hawley and Smoot.