Is Peace Breaking out So Soon in Yuan War?

About: AFP (Agence France Press), Nobel laureate Paul Krugman, New York Times, China Stock Digest, MarketWatch, Premier Wen Jiabao, Chinese Yuan, Vice Commerce Minister Zhong Shan, Morgan Stanley Asia Chairman Stephen Roach, New York Times blogger, Morgan Stanley economist

Ignore the headlines and read between the lines. Here’s a prime example. The latest headline from AFP (Agence France Press) trumpets the following about the yuan:

“China warns US not to politicize yuan debate”

That sounds a lot like an escalation of the war of words over the yuan which began last weekend. The squabble started when some comments by Premier Wen Jiabao about possible revaluation of the yuan were interpreted as utter intransigence by the Chinese. Then Nobel laureate Paul Krugman fired back in the New York Times that the U.S. should slap an immediate 25% tariff on goods coming from China.

A battalion of legislators dutifully gathered in Washington to threaten action, much as they have done for half a decade. That was enough for a media firestorm, despite the widespread exaggeration of both sides’ positions. (Please read my previous posting for a look at the nuances of what was really said.) A trade war with China and a wholesale attack on the dollar were considered possible.

Well, it turns out that today’s so-called ‘warning’ from China looks a lot more like an olive branch. MarketWatch printed the true facts from an original and official Chinese web posting as follows, “China called for dialogue, and said it will send a trade envoy to Washington to help soothe the growing trade rift.” Does that sound anything like a ‘warning’ from Beijing? Of course not.

Here’s the actual ‘warning’ that AFP referred to, spoken by He Ning, a top ministry official overseeing U.S. trade. He said, “We should take every measure possible to avoid politicization of the issue and allowing emotion to come into the debate.” This is clearly a plea to keep Washington’s intensely partisan atmosphere out of an international negotiation of enormous importance. It is another olive branch.

And so, Vice Commerce Minister Zhong Shan will visit Washington from March 24 to 26 to meet with officials at the Commerce and Treasury departments and the US Trade Representative’s Office, as well as trying to calm down frenzied legislators. As I remarked in my last posting, China will not respond obediently to threats and Minister Zhong backed up my point in his latest remarks, saying, “We are willing to have discussions with the US…, but if you pressure us to do something, that’s not in line with China’s culture.” In other words, China will not accept the loss of face that would result from bowing to an outright threat. Beijing will negotiate, but not at the point of a gun.

We should also give further credit to MarketWatch for reporting that, “Additional evidence that China is preparing to allow its currency to appreciate is accumulating, with various government bureaus reportedly conducting their own “stress tests” on the effects a stronger currency would have on the nation’s industry.”

China ‘stress tests’ suggest that a yuan revaluation may be coming, and at the very least, that Chinese leaders are considering the idea. The questions remain, when and by how much?

Meanwhile, it is in the interest of both economic superpowers to keep the rhetoric cool and deliberate, even if the media don’t.

As Morgan Stanley Asia Chairman Stephen Roach said, “We should take out the baseball bat on Paul Krugman”, the New York Times blogger who called for stiff tariffs against China. The well-respected Morgan Stanley economist said that Krugman’s call to force China to revalue the yuan is “very bad” advice, and that increased Chinese spending would be a better way of reducing trade imbalances. Amen.