Written by Laurence Brahm - Published by South China Morning Post on 12/16/2008

Neoconservative politicians are all similar. US President George W. Bush unilaterally sent in the troops; President Hu Jintao unilaterally sent goods. On December 1, when the yuan depreciated by 156 basis points, Beijing was sending a message to the world: namely, it had the financial muscle to both shake and break global markets. Those who do not “tremble and obey the emperor” will have markets flooded with discounted goods.

US Treasury Secretary Henry Paulson left Washington on December 2 for the final round of his brainstorming strategic economic dialogue (SED), announcing an agenda that encompassed energy and environmental issues as well as fixing exchange rates. China and the US bear most of the responsibility for our planet’s destruction through greenhouse gas emissions, yet neither plans any action on the environment. So the real issue on the table was, and remains, the yuan exchange rate.

As the meeting went ahead in Beijing, China’s official state media blasted Mr Paulson and the US government for being global “troublemakers”. Vice-Premier Wang Qishan sent another message: “We hope America adopts all kinds of necessary measures to stabilise the economy and financial markets, to secure the safety of Chinese assets and investments in the US.” It was a quirky reversal of American demands to unstable political regimes to protect American investments and assets.

Central bank governor Zhou Xiaochuan also scolded Mr Paulson. “The cause of the crisis is over reliance on credit and over consumption,” he said. “Being the world’s largest and most important economy, America should take the initiative and adjust its policy appropriately, to improve savings rates and reduce its trade and fiscal deficit.” China is now so confident of itself that its leaders are effectively challenging head-on the American – and European – economic and political establishments. The messages concerning China’s rising financial and geopolitical power should probably not be ignored: they may represent the telegraphing of Beijing’s policy intentions.

At such a crucial moment, the continuation of the SED mechanism may prevent any altercations leading to brinkmanship. As leaders in Beijing wake up to the unfolding global financial crisis, their confidence could dissipate into panic, leaving two superpowers blaming each other for their own systemic inadequacies. Beijing naively views the SED as a way to help America “understand” China through more dialogue. But America has excellent intelligence about what is going on in China and does not need dialogue to understand it better. Rather, the SED is much more of a forum to push very specific agendas, for instance currency appreciation and the opening of capital markets.

If China’s capital markets had been opened earlier, the global financial disaster would already have begun to take its toll on the nation. Because those markets are closed, the effects are more indirect. Factories have started to close, industry has been hit, exports will slow and eventually social instability will rise, but not until the second half of next year.

At the recent SED, both parties said they expected “future financial co-operation”. That basically means that if America does not boycott Chinese goods, China will buy American bonds. Beijing believes that if it allows the yuan to depreciate, China can export its way out of the global financial crisis. The problem is that nobody in North America or Europe is buying much.

Whether the SED continues under the next US administration will make a critical difference. Ideally, incoming secretary of state Hillary Rodham Clinton should raise it to the level of direct dialogue with Premier Wen Jiabao, to avert any crisis brewing. However, if the new Obama administration thinks the two nations’ interests are strategically incompatible – and that a crisis should just be allowed to brew – then the SED may become a mere talking shop. In that case, expect the worst.

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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