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China vs. the World: "Distress and Anger" Not Limited to U.S., FT's Wolf Says

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China vs. the World: "Distress and Anger" Not Limited to U.S., FT's Wolf Says
Posted Oct 08, 2010 12:32pm EDT by Aaron Task in Newsmakers

Earlier this week, Chinese Premier Wen Jiabao said a sharp rise in the yuan "will bring disaster to China and the world."

U.S. Treasury Secretary Tim Geithner retorted by saying China's policy of keeping its currency undervalued "sets off a dangerous dynamic."

Such heated political rhetoric - along with Friday's weak jobs report and a recent House vote condemning China's currency regime - underscores the urgency of this weekend's G7 and IMF meetings in Washington.

The meetings come amid a "period of profound anxiety, which is feeding into the political climate and poisoning a lot of the political debate," says Gillian Tett, U.S. managing editor of The Financial Times.

Martin Wolf, The FT's chief economics commentator, notes the tensions over China's currency are not exclusive to America.

There is "very considerable distress and anger" among emerging market countries, which are seeing immense inflows of capital because of the Fed's aggressive monetary policy, Wolf says. With China's renminbi pegged to the ever-weakening dollar, countries like Brazil "are concerned either they lose competitiveness [vs. China] or they lose monetary control and get a lot of inflation," he says.

The Paradox of Perception

Indeed, it was Brazilian finance minister Guido Mantega who warned of the potential for a "currency war" last month and the Bank of Japan which has been intervening most aggressively to weaken its currency.

The threat is real, but don't expect any substantial action at the DC confabs, even though the dollar hit a 15-year low vs. the yen, a record low vs. the Swiss franc and multi-year lows against the Australian dollar Friday.

"I believe we are in paralysis," Wolf says. "The Chinese are saying, ‘no we're not going to do what you want because it's going to be bad for us.' To everyone else, China is a colossus but they insist ‘we are a developing country'."

At an FT conference this week, Pimco's Mohamed El-Erian explained the roots of this paradox of perception: While China's economy is now the world's second largest, it ranks just 99th in the world in per capita income.

How policymakers address this conundrum will have profound ramifications for the global economy. "If relations between the most powerful country in the world and the second-most powerful country in the world become really bad we will feel it across a huge range of issues," Wolf says.


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