With the pitfalls of another presidential transition in mind, Wen Jiabao, China's premier, headed to Davos last week, ready to prescribe Chinese remedies for global maladies. Tim Geithner, US Treasury secretary, chose the first week of the Obama administration to brand Beijing as a currency manipulator before the US Senate – raising fears of a revival of protectionist legislation aimed at punishing China. This marked a departure from Bush-era China policy, which stopped short of taking this serious step, in spite of ballooning trade imbalances and the Chinese export boom. Now the boom is not exactly a bust, but China is sinking economically as it confronts developmental limits and domestic challenges. Its exports are falling.
The US Treasury tried and failed to change China's currency policy in the 1930s. The old silver-based yuan was forcibly revalued by the US in 1934, by means of a massive silver purchase programme. Congress wanted to stimulate global demand from China to offset the effects of the depression in the rest of the world. Imports did not rise, even after a 40 per cent revaluation against the dollar, demonstrating that exchange-rate solutions will fail when demand is in a global free fall. Seventy-five years later, the US Treasury cannot ignore the fact that China has become its largest creditor. Beijing can move cash quickly elsewhere, in search of higher returns in a world of falling interest rates. Mr Geithner could be taking on more risks than he expects by pulling a politically sensitive lever that is not economically effective.
In a crisis of this magnitude, no one should be surprised if China acts in its own interests. During the Asian financial crisis in the late 1990s, China resisted a round of competitive devaluation, but might not be able to this time. Ten years ago, exports represented about 20 per cent of China's gross domestic product; today it is twice as dependent on exports. Factories are closing, unemployment is increasing and GDP is falling. It is unlikely that a stronger renminbi is going to encourage Chinese consumers to buy foreign goods. Decoupling is dead, so do not expect China to be an economic bright spot as the lights dim throughout the rest of the world, no matter how cheap the dollar gets.