Sometimes I wish China would just do it: announce an immediate 40 percent strengthening of the yuan to show the world what would happen.
US interest rates would shoot higher as China -- and Asian central banks in general -- sell devalued Treasuries. Sticker prices at Wal-Mart and Best Buy would skyrocket. China's economy, one on which Japan is now highly dependent, would grind to a halt, risking social instability in the world's most-populous nation.
Shock waves would sweep through the corporate US. A sharply stronger yuan would make household-name US companies cheaper for acquisitive Chinese executives. If you think China is big news in Washington today, just wait until companies in the world's fourth-biggest economy start bidding for General Motors Corp, Microsoft Corp, Boeing Co or Exxon Mobil Corp.
So if the goal is slower global growth and destabilizing what many see as the market of the future, by all means keep pushing the yuan issue. Or China-obsessed Washington could spend that time and energy getting its own economy in order.
IGNORED ECONOMIES
Following the chatter coming out of Washington these days, you would think there's only one economy outside the US.
Proving the point, US Secretary of the Treasury Henry Paulson this week is visiting China for the second time since becoming secretary in July. As Treasury chief, he has yet to set foot in Japan, by far Asia's biggest economy and one that has lots to do with China's reluctance to boost the yuan.
Paulson has yet to visit India, an economy that may be just as important as China's or Japan's 30 years from now. Nor has he put on his itinerary this week other highly significant economies to see how they are going. This includes South Korea, Asia's third largest economy; Indonesia, the world's fourth-most populous nation; Thailand, having a leadership crisis; and Malaysia, where political spats are slowing economic change.
It's not hard to see why China is at the top of Paulson's priority list. No economic relationship is causing more heartburn in Washington. In the first 10 months of this year China passed Mexico as the second-largest US trading partner.
The problem is a trade gap totaling almost US$800 million a day. In October, China accounted for 41 percent of the US$58.9 billion US trade gap. Raising the stakes, the new Democratic-controlled Congress will be led by Nancy Pelosi, who opposed China's entry to the WTO five years ago. The year ahead may be an ugly one for US-China relations.
Yet this is a be-careful-what-you-wish-for moment for the US. There are two places Paulson should be focusing far more attention on than China -- Japan and domestic consumers.
Japanese Prime Minister Shinzo Abe can't be happy that such a high-level US delegation, which includes Federal Reserve Chairman Ben Bernanke, is bypassing Tokyo. It's the latest reminder that Japan is becoming an ever-smaller blip on Washington's economic radar screen.
That's a mistake. If the US wants China to boost the yuan 10 percent, 20 percent or 40 percent, the road goes through Tokyo.
EFFECTS OF THE YEN
Much is made of how Japan hasn't officially sold the yen since early 2004, yet that fact hardly matters. In the 15 months leading up to March 2004, Japan spent roughly the gross domestic product of Indonesia -- Southeast Asia's biggest economy -- to keep the yen from rising. Memories of that campaign loom large; no trader in their right mind would test Japan's resolve to maintain an accommodative exchange rate.
The mere suspicion that Japan will step in and manipulate markets gets the job done. That's why the longest expansion since World War II and a Bank of Japan rate hike haven't boosted the yen this year. A key reason why China, Korea, Taiwan and other Asian economies are fretting about rising currencies is because the yen isn't rising.
A weak yen has removed the urgency to produce growth at home, leaving Japan mired in the mercantilist strategies of the past. China knows this and until the yen rises sharply, the yuan won't either. Sadly, Paulson isn't focused on Japan at the moment.
The Treasury secretary's focus on China is distracting him from the other big problem: US households need to save more.
The US' trade imbalance is far more homegrown than officials in Washington admit. Zero savings aren't stopping households from consuming; loading up on debt takes care of that problem. So have the Federal Reserve's low-interest-rate polices of recent years; they made servicing household debt less painful.
Consumer spending accounts for about 70 percent of the US economy, and so White House officials have been out in force talking about how wonderful things are and how the jobless rate has dropped. Yet the US is living unsustainably beyond its means, as evidenced by its huge current-account and budget deficits.
A stronger Chinese currency won't change the unbalanced nature of US growth. Remember that the Plaza Accord of 1985, which sharply weakened the dollar versus the yen, did little to improve the US' balance of payments. Instead, it contributed to the asset bubble that led to Japan's lost decade in the 1990s.
The US can keep complaining, but it might have more success with problems at home rather than obsessing over China.
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