Diplomacy with Chinese characteristics

Apart from fending off inflationary fears and helping drive the economy towards internal consumption, letting the yuan revalue might well become the boldest diplomatic move by the Chinese government in the last few years.

Although much has already been written about recent U.S. congressmen rumblings on China's currency, the Americans won't be the only ones positively affected by such measure. Oviously, a more expensive yuan (and a cheaper dollar) would boost American plans to reorient its economy towards exports and investment (see related article in The Washington Post) and partially away from consumption and debt, which is also good for the whole world, as economic imbalances in the U.S. were the main factor behind the financial crisis we are just (and barely) leaving behind. In any case, such a move would probably boost American exports to China, as its products would become more affordable to increasingly affluent Chinese consumers, while not needingly rising the cost of the items America imports from Asia.

In fact, a stronger yuan would have a specially positive effect on other developing economies, such as India, Brazil and, most notably, the rest of ASEAN countries, whose exports and competitiveness have also been hit by the artificially low exchange rate of the yuan. It is quite obvious that any manufacturing jobs lost in Chinese export-oriented businesses will mean more jobs in similar industries located in lower-wage, nearby countries, such as Vietnam, Laos, Cambodia or even Indonesia -- and not in America, whose productive system is no longer ready to manufacture  items such as clothing, shoes and tech products. In fact, the upcoming yuan revaluation could accelerate a delocalization process that was already underway, thus further transforming the Chinese ecomonic model from a low-cost, export-based one to a more higher-value, service-oriented one.

Moreover, such a move would also please the global diplomatic community (and, more specifically, the rich economies') after the Copenhagen fiasco, where Chinese reluctancy to cooperate, topped with sending a junior minister to a meeting which included Barack Obama (although Wen Jiabao has recently denied such claims), allegedly led the negotiations towards a quasi-ridicule and a last minute non-binding, almost empty agreement.

Also adding to the grudges were Chinese economic activities in Africa, which raise suspicions among developed nations that accuse China of funding crony, bloody dictators (arguably, what some Western powers have already done in the past, specially during the Cold War era), and its reluctance to agree to tightening sanctions on Iran -- a stance that is probably also going to change, in great part thanks to the recent conciliatory tone and decisions by the U.S. Government.

In that sense, we have to acknowledge the role played by the Obama administration and, more precisely, by Vice President Joe Biden by not giving in to mounting pressure among US lawmakers, who had repeatedly asked to label China a "currency manipulator", giving way to the imposition of tariffs on Chinese goods (on the basis of the dumping this artificially low currency exchange implies) and, quite probably, to a trade war between the world's to biggest powers and economies.

Biden's and Obama's decision to postponing the publication of a U.S. Treasury report (see article in the Financial Times) until after the Nuclear Security Summit (see information on the US Department of State website), with Chinese President Hu Jintao among the high-ranking invitees, was held was a deft diplomatic move that obviously had a positive effect on the Chinese leadership. As we have clearly seen in the last few years, as Chinese global clout grows bigger, its leaders have felt uneasy about acknowledging and responding to foreign pressures and expectations, giving leeway to nationalistic voices and feelings, both from inside the government and the (government-controlled) media.

This attitude of entrenchment should come as no surprise: Chinese leaders are extremely reluctant to surrendering to foreign pressures, even if it could sometimes do them good (for instance, in the environmental field), for both historical and pragmatic reasons. After its de facto dependency of Western powers during the 19th century and the beginning of the 20th century, which led to the ultimate decadency of the once mighty Chinese Empire and to a bloody Japanese occupation until 1945, Chinese leaders, heirs of the Communist liberators, are understandably wary of Western pressures on what they consider issues of their sole jurisdiction (which is in fact leading the way towards a growing trend of unilateralism in world politics). Linked to that, the Communist party grip on power depends on both continued economic growth and assertion of Chinese independency and soft power, a task they have "inherited" from the Mao era.

Therefore, the wait-and-see, appeasing approach adopted by the U.S. administration, coupled with relentless and coordinated -- but not aggressive -- pressure by other world powers is probably the best way to deal with China and to affect its government's decisions. (as also suggested by this New York Times editorial) As China struggles to assert its newly found global clout, patience and understanding will bear the best fruits for everyone involved.