"Mutual Leverage" Between China and the US

After this item, on Friday, about speculation that the Chinese government might stonewall and refuse even the slightest gesture toward revaluing its RMB currency; and this news, yesterday, that at least some "flexibility" will resume, here's a note from Damien Ma, of the Eurasia Group. He's the one with whom I've had several video "China Today" discussions, of which there will be more shortly. He writes:

I think this was ultimately a political decision, and was in some way a signal of the mutual leverage between the US and China. There was a time during the depths of the economic crisis when the currency peg had a decidedly economic logic, but I think once they saw their 1Q GDP was growing at 12%, that turned the corner on thinking. The argument [inside China] had always been between the exporters and the inflation hawks (the liberal financial set in the central bank, think tanks, et al). The exporters quickly lost their support when the emphasis shifted to inflation and overheating.

Of course, the eurozone crisis gave the exporters a big gift, and allowed them to revive their fight against appreciation. But ultimately, the kind of managed, creeping appreciation will not dampen inflation significantly (wage hikes is probably a bigger contributor to inflation) nor will it decimate the export sector like the Commerce ministry claims. In fact, the Commerce ministry itself has projected a total trade surplus of only about $100 bn this year, compared to the trade surplus with the US two years ago at something like $300 bn. In other words, if that's true, the export decline has been "priced in" already by the very faction that's arguing that exports will be terrible. And if you look at Chinese growth last year, of the 8.7% GDP growth, net exports contributed a -3.9 percentage points to growth. In other words, if exports were great, China would've grown 13%, tying its record in 2007! So without exports, you still grow at nearly 9%, which means growth has been primarily driven by domestic demand and fixed asset investment. And by all indications, Beijing seriously wants to shift to an economy based more on domestic demand and consumption....

I think it's worth noting that with all the exaggerated perception of Chinese leverage and clout, this announcement suggests that US leverage over China is not "weak." It would be hard to read this move from Beijing, on a weekend four days before the G20, as something other than tacitly acknowledging US and multilateral pressure. There is no doubt that China will push back harder on a host of issues going forward given its newfound strength, and we might have to work harder to secure their cooperation. But to hyperbolically magnify Chinese leverage is a mistake. This is a country, after all, that still is unwilling to admit that the DPRK [North Korea] torpedoed the South Korean corvette and cannot tame a wily country that behaves more like a "rogue Chinese province."

This interpretation makes sense to me -- including the final emphasis on the real "correlation of forces" (ie, overall dimensions of strength) between China and the US. The Chinese system is fast-growing and promising, as Ma points and as so often described here. It's not yet in a position of dominance, popular delusions in Australia and the US notwithstanding. Whether it will move to that position -- well, of course that's the ongoing topic for exploration.