China Fires Shot

The Chinese government politely reminds the US government that it is financing American debt, and it's tired of US bullying regarding the yuan:

In a Wednesday opinion piece in the state-run China Daily, a Chinese government researcher made what sounded like a warning to U.S. policymakers not to get too tough in insisting the yuan should appreciate. The researcher, He Fan, noted that China has accumulated "a large sum of U.S. dollars" and that its holdings contribute "a great deal to maintaining the position of the U.S. dollar as an international currency." If the yuan's exchange-rate against the dollar does not remain stable, he said, China could be forced to take strong action. "The Chinese central bank will be forced to sell U.S. dollars once the [yuan] appreciates dramatically, which might lead to a mass depreciation of the U.S dollar against other currencies," wrote He, who works at the China Academy of Social Sciences. The Daily Telegraph of London also quoted Xia Bin, director of the financial research department of the State Council, which advises the Chinese cabinet, describing Beijing's foreign reserves as a "bargaining chip."

I'm with China on this one. China can't afford an unstable currency right now. And this government doesn't respond well to threats. Nor do the Chinese people. They are crafty and smart and will silently undermine your efforts.

A politician mentioned that 2007 will be a good year for US-China relations if nothing at all happens. That was best case scenario. The little rhetoric that has come from presidential hopefuls hasn't been encouraging or intelligent.

Here is more from the China Economic Review:

US President George W. Bush has warned that any attempt by Beijing to push down the value of the dollar in retaliation for US pressure over China's alleged currency manipulation would be "foolhardy." Speaking to Fox News Wednesday, Bush said he hadn't seen an article that had appeared in Britain's Daily Telegraph newspaper which cited two Chinese officials at leading Communist Party institutions as saying that a mass sell-off of US Treasuries could follow any move by Washington to impose trade sanctions to force a yuan revaluation. The president doubted the report was an official government position while US Treasury Secretary Henry Paulson described a potential Chinese attack on a weakened US dollar as "absurd," AFP reported.

Secretary Paulson may view the threatened attack as "absurd", but the Chinese, if faced with an economy in ruin (following a forced revaluation), would most likely strike back.

There is an expectation that everyone thinks like we do. The Chinese have a completely homogeneous society and with a few very brief and very small exceptions always have. They have not had much exposure to "western" thinking. So they don't see things the same way US government officials do, and their behavior isn't always predictable in the same way that say, France, is. This runs true in business too.