Written by Laurence Brahm - Published by South China Morning Post on 06/07/2005

July 1 is a date to remember. It marks the founding of the Communist Party, the handover of Hong Kong, the protests in the city which led to the shelving of Article 23 anti-subversion legislation, and the start of the Asian financial crisis.

With new policies of monetary brinkmanship brewing in the White House, it might be a good time to reflect on the havoc that melted businesses and economies during the 1997 currency speculation onslaught.

To date, about US$100 billion has poured into China, mostly through American and European investment banks speculating that Beijing will soon crack under US pressure. The Hong Kong dollar has also been targeted. Of course, such speculation is all in the name of good business, because that is what fund managers do, right? Based on this logic, economists might think it irrelevant to assume that US pressure on China to revalue its currency is politically motivated. But people should not jump to hasty conclusions.

The White House appointment of Olin Wethington as a special envoy to “engage” China on currency revaluation may seem undiplomatic or even confrontational. But clearly, forcing the issue seems to have become a political rather than economic point of contention on US President George W. Bush’s worldwide agenda.

Vice-Premier Wu Yi, during her visit to Tokyo, drew the line by saying: “If the conditions are right, we will conduct reform voluntarily, even without pressure from foreign countries. If the conditions are not right, we will not carry out the reforms, no matter how much pressure foreign countries exert. We will abide by market rules.”

Indeed, some people wonder whether the nation which once stood for free-market rules is now using monetary unilateralism as political pressure to leverage domestic protectionism – while its antithesis, the nation once closed and run under protectionist rules, is trying to open its financial markets under a World Trade Organization 2006 timetable, without major economic or social disruption. Such a formidable task deserves patience and international co-ordination.

The media, foreign economic think-tanks and even some business circles do not seem to have understood Ms Wu’s point. For China, shifting its currency upwards is not the issue; its objective is to float a convertible currency. Former premier Zhu Rongji’s ambition to achieve this was derailed by the Asian financial crisis. Thus, the issue is not a peg shift, but the entire process of financial and monetary reforms, which will ultimately make or break the China model. We are talking of a decade of careful economic engineering and reform. Why should China’s leadership go off course now by doing something surplus to its agenda – just because the White House says it must?

China has not adopted shock-therapy policies which disrupted other nations. So why, in the final lap of financial reforms, should Beijing do something to disrupt its proven formula? While it may sound farfetched, is it unfathomable to ask whether the White House is precipitating another Asian financial crisis? During the last one, the US Treasury, the International Monetary Fund and the World Bank all called for China to devalue the yuan. It did not and, as a result, anchored Asia’s currency stability throughout the crisis. The region’s rebound was due, in large part, to China’s steadfastness.

At the risk of sounding politically incorrect, the truth is that China should not move its peg based on unilateral White House pressure. To do so will not save any American jobs. It might cost China a few hundred thousand, but even so, on the massive scale of reform, such a consequence is manageable. But these points are no longer the core issue. The question is whether the Bush administration’s monetary unilateralism is placing America and China on the threshold of a new cold war. If so, in the interests of all, it should be averted.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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