Connect to share and comment

The China currency flap: reading between the lines

It's been a bumpy week for US-China relations. This is why it matters.

All this hot air stems from China's decision to peg its currency to the U.S. dollar — currently 6.83 yuan to one greenback.

Lots of developing countries have pegged their currencies to the dollar over the years, and for good reason: While these governments are essentially ceding monetary control to the Fed (the policies that affect the dollar, after all, impact their own currencies), they get something even more important in return — stability.

Despite the crisis-driven upheaval of the past year, the U.S. economy — including the U.S. currency, U.S. Treasury notes and bonds, and the strong hand of the U.S. Federal Reserve — still represents stability around the world.

And stability is what global trade needs. It's what governments and companies need to attract foreign capital and investment. It's what's needed to grow economies and raise the living standards of people.

During its meteoric rise of the past three decades, all of these happy things have visited the Chinese economy.

And — lest U.S. politicians forget — Chinese stability and economic growth have also hugely benefited the United States.

A richer China is a more peaceful China. Increased trade with China is good for U.S. companies large and small. And close economic ties with China helps keep the price of many goods affordable in the U.S., which boosts the living standards of Americans.

Of course, there are many problems with the current arrangement. China has amassed a huge trade surplus with the U.S., and as a result, a giant pile of money now sits in Beijing that could be flowing throughout the global economy to more productive uses.

Moreover, China's rising economic power makes many in Washington nervous, which fuels other problems the two countries are butting heads over — from military sales to Taiwan, to U.S. President Barack Obama's meeting with the Dalai Lama, to policy differences over Iran, climate change and human rights.

But as this currency debate rages — and rest assured it's not going away anytime soon — here's what you need to remember: This all boils down to politics, on both sides of the Pacific.

An unemployment rate near 10 percent is politically unsustainable in the United States. As a result, and with U.S. midterm elections rapidly approaching, Beijing is a convenient punching bag for U.S. lawmakers.

From this narrow political perspective, the Chinese aren't seeking stability. They're "manipulators." Hence Graham's chest-thumping, the ornery letter from the House members (threatening, of all things, a potential trade war), and Huntsman's stern message delivered in the very belly of the dragon.

At the same time, the whole game in China is whether the central government in Beijing can retain political power by gradually spreading the country's growing wealth from the coastal regions to the poorer rural areas that are home to the majority of its population. Economic growth is great, but economic inequality is toxic. The last thing a nervous Beijing needs is sudden economic instability, triggered by a sudden rise of its currency.

So this latest currency flare-up is about a lot more than the number 6.83. It's about more than this dollar peg, or that yuan appreciation.

In truth, it's about two great powers, with two very different political systems, both struggling to cope with the vagaries of global economics — the one great and powerful force sweeping from Washington, to Chicago, to Beijing, Kunming and, ultimately, through every corner of the world.