Opinion

The high cost of ignorance

By Liu Junhong (China Daily)
Updated: 2010-03-29 07:52

The stereotype mentality indicates Washington's lack of knowledge about ongoing changes in the Chinese market and a changed investment relationship with China. Since the Securities Law and the Company Law took effect in China in 2005, international fluid capital has begun to shift investment from the field of fixed assets and stock market to stock acquisitions, private equity as well as enterprise realignment and mergers. Their shift to the nontraditional market makes it difficult for the Chinese authorities to follow their traces and then contribute to an exaggerated "China investment". This could also partly explain worldwide panics about China's "red capital". Decision-makers in Washington have turned a blind eye to the fact that the zero-interest rate adopted by the US Federal Reserve since the crisis has further added to in-pours of a large sum of international capital into China.

For many years, the US has done what it could to strike a balance among the world's other currencies to maximize its own national interests. Since the creation of the euro in 1999, delicate changes have occurred to the dollar-dominated international currency system and a bipolar international monetary order between the two currencies has taken shape. To maintain the dollar's long-established hegemonic status, the US has taken measures available to acquire an expected equilibrium among the world's other major currencies. These Washington tactics was to Japan's advantage and helped Tokyo keep its yen's fluctuations against the dollar to a minimum. As a result, Japan had effectively maintained its trade and investment interests.

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Due to Japan's exports revival, foreign trade expansion and its growing surplus in its current account, the yen is currently under huge pressures for appreciation. The dollar's lingering low interest rate against the yen has also pushed international funds to flow into Japan, adding to an appreciated yen. However, the equal foreign policy pursued by the Japanese Yukio Hatoyama government with the US has resulted in increasing frictions with Washington. An appreciated yen, in the eyes of Washington, would possibly squeeze the dollar's space and accelerate its demotion to a US-based local currency. Under these circumstances, Washington believes it is its best choice to force China's currency to revalue while acquiescing to the yen's depreciation to strike a balance in the US-forged international currency system.

But this deliberate policy maneuvering exposes Washington's short-sightedness about the nature of a global financial crisis. In the 21st century, the flow of international capital no longer submits to any single country, no matter how powerful it is. Washington's "RMB appreciation" uproars will also bring itself a huge financial risk. Any large range of revaluation of the Chinese currency, as Washington has required, is likely to plunge the global monetary market into extreme chaos.

Cooperation will bring the two countries a win-win result and help them to play a larger constructive role in global affairs.

The author is a researcher with the China Institutes of Contemporary International Relations.