Blogland is stinking with news about China today. Much of it is related to the administration's get-tough-but-not-too-tough shot at the Chinese currency peg. From the New York Times:
The Bush administration warned China today that its currency policies were "highly distortionary" to world trade and implicitly threatened to retaliate if Chinese leaders did not change course within the next year.
In language far harsher than any it has used before, the Treasury Department declared that China's fixed exchange rate between its yuan and the dollar posed a risk to itself as well as to global growth.
But the administration stopped just short of accusing China of outright currency manipulation, a move that would have immediately started a process of direct negotiations with Chinese leaders and the possibility of retaliation if those talks failed.
Related stories appeared in the Economist -- the winner of the pun of the day contest -- and at Bloomberg.
Brad Setser has his usual exhaustive (but not exhausting) look at the issue, and sees a pox on both our houses:
Both China and the US have behaved irresponsibly over the past few years. The US, by running fiscal deficits that contribute to its domestic savings shortage. China, by refusing to change its exchange rate regime even as its trade surplus kept growing and the pace of reserve accumulation kept accelerating (Rumors are that China’s reserve accumulation picked up substantially in April … ).
Kash suggests that should maybe be on one of our houses (guess which one), and Jane Galt worries that fewer "people... are looking at the thing from China's point of view, where there are some real risks, as well as benefits, to revaluation."
In a separate post, Kash notes...
China's economy continues to roar ahead while (officially measured) prices do not.
... but is nonetheless skeptical:
Is the rate of inflation in China actually falling? Maybe. But I'd guess that it is almost as likely that it is rising. One thing we can be sure of, however: production by the Chinese economy continues to leap ahead at an astonishing rate. I have my doubts about whether China's economic managers have actually succeeded in cooling the economy, as they have claimed.
Here's my contribution to today's Chinamania, from FXStreet.com, where there is a link to a report on the question: "Is China Destined to Be the World's Largest Economy?"
To put China’s rise since 1978 into perspective, we compare it with two other development experiences: the U.S. economy between 1869 and 1929, its most rapid growth phase, and the Japanese economy between 1956 and the present. Seen in that light, Chinese economic development has been more rapid than the comparable stages in U.S. and Japanese economic development.
However, U.S. and Japanese economic history also hold some lessons for China. The U.S. had some major recessions in its rapid growth phase, something that China has avoided so far. However, China likely will experience a significant slowdown, if not outright recession, sooner or later. More ominously, Japan’s economic difficulties over the past 15 years, which are due in part to the weakness in the banking system that the bursting of asset price bubbles caused, are a stark reminder that rapid economic development is not guaranteed. Indeed, China’s state-run banking system is already that economy’s Achilles’ Heel. While we are not brazen (and certainly not knowledgeable) enough to proclaim that the Chinese economy will crash and burn, we would stress that downside risks to continued strong growth in China are not insignificant.
Indeed.
UPDATE: If you're the betting type, Tyler Cowen has a link for you.