China Turns Tables on AAA Debt Time-Bomb Nations: William Pesek 2010-06-20 19:00:00.1 GMT

Commentary by William Pesek
June 21 (Bloomberg) -- Your move, folks.
That’s the message from China’s surprise move to allow a more flexible yuan. China, in signaling it’s okay with a rising currency, voiced a strong vote of confidence in its economic outlook. It also shifted the onus to the developed world in a crafty and unambiguous way.
Timothy Geithner and his team at the U.S. Treasury should keep on ice the champagne they’re tempted to open. Now it’s time to start getting their own imbalances in order. The debt explosion of the past two years isn’t just unsustainable, it’s a growing threat to global stability.
Chess games are won by those who can think and plan the farthest ahead. China, at least at the moment, appears to have a better sense of how the board is laid out. The question now is what Geithner and his partners in history’s greatest debt orgy do.
It’s wrong to conclude China was browbeaten into acting.
Yes, the step means Chinese officials can breathe easier arriving in Toronto for next weekend’s Group of 20 meeting. Yet a rising yuan will make it easier to tame asset bubbles and reduce inflation risks. It also increases the purchasing power for the nation’s 1.3 billion people. Efforts to kick China’s addiction to exports are now underway.

Reflationary China

That will require some adjustments for the outside world.
A stronger yuan is reflationary. Chinese will, over time, be able to buy more goods from other countries. Increased import activity coincides with a sudden militancy among Chinese workers demanding higher wages.
While good developments in the long run, both phenomena will affect global inflation rates and require considerable nimbleness on the part of multinational companies. The infinite sea of cheap, docile Chinese labor is evaporating.
None of what China is doing will placate the Lindsey Graham’s and Charles Schumer’s of the world. Both U.S. senators have had a linear focus on China’s undervalued currency, as if it were the root cause of the U.S.’s problems. While China’s role in global imbalances is indisputable, officials in Beijing didn’t put the U.S. where it is.
It was the administration of Bill Clinton that decided to remove Depression-era banking-system safeguards and fight efforts to regulate derivatives. It was President George W.
Bush who removed every financial regulation in view, squandered a budget surplus through tax cuts for the ultra-rich and put a pointless war in Iraq on a credit card.

Look in Mirror

China didn’t tell Americans to buy homes they couldn’t afford. It didn’t encourage bankers to take on enough leverage to topple Wall Street’s mightiest names. It didn’t ask the U.S to flood global markets with Treasuries because it wanted to own a mountain of them. China didn’t lobby against reforms that might protect the U.S. from another financial crisis. That will be on President Barack Obama.
Now, U.S. lawmakers who thought China provided the perfect scapegoat for all that ails their supporters need a new boogeyman. Or, they could just look into the mirror and opt to move the U.S. onto a more sustainable economic course.
This weekend’s G-20 meeting is such an opportunity. There, China’s currency will take a backseat to the gaping budget deficits among industrialized nations. It will be quite a spectacle to see developing-world policy makers wagging fingers at Group of Seven nation members.

Core in Crisis

That’s indeed where we find ourselves. The crisis of the past two years didn’t come from the periphery of the global economy, but its core. It’s the irresponsible policies of the U.S., the euro zone, Japan and the U.K. that are imperiling markets, not those of China, India or Brazil.
Japan is a fascinating case in point. Barely two weeks into his premiership, Naoto Kan is raising many an eyebrow by warning that Japan risks going the way of Greece. Such hyperbole is needed to wake Japanese politicians out of their two-decade slumber. While they snoozed and saved their jobs, Japan amassed the biggest debt in the developed world and failed to find an exit strategy from zero interest rates.
There’s been considerable soul-searching about the U.S., U.K. or euro zone becoming the next Japan. In many ways, other industrialized powers wish they would be that lucky. Japan hasn’t unraveled because its households have $15 trillion of savings and more than 90 percent of public debt is held domestically. A run on the yen was never a huge risk.

Folly Amid the AAAs

The same can’t be said about the dollar, euro or pound.
Consider why gold is up more than 30 percent over the past
year: many investors have zero trust in the most liquid currencies.
Those much-coveted AAA credit ratings mean less with every passing day as the biggest economies issue more and more IOUs.
It would be a crime if the G-20 left Toronto without exploring how to restore trust.
China has much further to go in rebalancing its economy.
Letting the yuan rise indicates a new confidence to step up the process. It also makes a mockery of rich nations demanding that developing ones do all the heavy lifting.