The following was written for an international business consultant's monthly newsletter:
As the Asian economic engine continues its expansion, growing pains emerge for all trading economies.
China Is a "World Power" — Stop Denying It.
While even the Chinese have been denying the "world-power" notion for years, China's dynamic economy, vast resources, mounting foreign exchange reserves, and its increasing impact on the world economy, coupled with emerging diplomatic interaction, make clear that ignoring the quiet giant is no longer an option.
In fact, China's transition from foreign aid recipient to foreign aid provider (to numerous other countries), its participation in Middle East peacekeeping missions, strong commitment to enforcement of the Nuclear Nonproliferation Treaty, and its recent United Nations Security Council vote to impose sanctions on North Korea all reveal the new reality: China is no longer "hiding its ambitions and disguising its claws," a decades-old policy prescription of the late Deng Xiaoping.
China has lost the luxury of quietly pursuing its internal economic development agenda, without being involved politically in world affairs or taking leadership roles abroad to serve its increasingly complex economic interests. So, its foreign-policy posture and goals are changing and will continue to do so, even if cautiously to avoid world perception of "China as threat."
China's leaders today recognize that their foreign policy posture and development aims must be communicated as "win-win" to the West. Learning from others' lessons in history, and its traditional cultural modesty, China's development advocates recognize development must not come at the expense of other's decline. Some will continue to stress China's "developing-country" status, while allowing that their inevitable growth, and commensurate power shift, will occur as part of a responsible process working in harmony with the existing international order.
But, others are thinking differently about projecting power. Economic success also breeds confidence, even patriotism, and a desire to emulate history's great powers. These cultural facets are now beginning to emerge in China. Especially as prosperity enables many to discard traditional notions of modesty and quietness.
Cognizance of its growing world role and the cultural imperative of managing the many challenges of growth effectively is illustrated by China Central Television's recent widely viewed and well-rated documentary titled "Rise of Great Powers" broadcast twice over 24 evenings. It presents the Chinese with a detailed look at the history and achievements of nine (non-Chinese) historic world powers, and stresses themes like unity, stability, and investment as vital, while downplaying rule of law and political liberalization themes.
The power of economic growth enables many things to change. For example, China's military spending, according to the CIA, is probably up to three times higher than publicly revealed and second only to US military spending. Yan Xuetong, foreign affairs specialist at Beijing's Tsinghua University, argues that China has surpassed Japan, Russia, Britain, France, Germany and India in economic, military, and political power, leaving China second only to the United States, he said.
Wake up America, the advantage and power gaps are narrowing.
The U.S. Dollar is sliding against Asian currencies.
Even prominent Asian bank officials foresee the Dollar's continuing decline, and are concerned enough to implore East Asian countries to manage this issue and their own currencies in a responsible manner.
With $3 trillion in foreign exchange reserves (mostly US$), $1 Trillion of it in China alone, and large Dollar purchases in 2006, East Asian monetary authorities have helped stem the Dollar's decline, but must adopt policies designed to foster the appreciation of their currencies against the U.S. Dollar. China's accumulation of large foreign currency reserves has occurred because it has held its currency value down through foreign exchange market intervention.
The fact that U.S. Treasury secretary Henry Paulson Jr., Federal Reserve chairman Ben Bernanke, and an uncommonly large Cabinet delegation have held high level talks in Beijing recently underscores the gravity of the circumstances.
Competing interests among the various East Asian countries and differing political and economic relationships with the U.S. conspire to diminish the odds of a coordinated management protocol among those nations regarding the issue. China's actions (and their scale) for example, have made it more difficult for other Asian countries to govern their monetary systems.
While these countries may not be able to cause their currencies to appreciate in unison, they can and should work toward preventing their currency values from swinging sharply vis-a-vis each other.
Economists widely agree that the U.S. Dollar will need to decline by between 30 and 40 percent (trade weighted terms) for the U.S. to lower its current account deficit.
For even the biggest Asian exporting countries, the U.S. market accounts for no more than 1/5 of their total exports, so their economies can endure even a 20% U.S. Dollar decline, especially if their currencies appreciate more or less as a group. If East Asian currencies can maintain current exchange ratios with each other and non-U.S. currencies, a 20% Dollar decline would translate roughly to a 4% trade-weighted appreciation for the Asian currencies (1/5 of 20%).
Given the circumstances, the challenge for East Asian central bankers seems to be balancing the urge to sell its US Dollar currency reserves as the Dollar declines, against the risk of causing a sharp drop in the value of their reserves and the Dollar should they all simultaneously rush to sell Dollars. Conversely, they must be wary of preventing their own currencies from rising too much against the Dollar, since encouraging that to preserve the competitiveness of their exports risks weakening their own currencies and causing the accumulation of foreign currency reserves.
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