Money and politics

In the end, it will be a political resolution, not a financial one, since the financial one is impossible. That means the related price actions may not be what are expected today, either. The reasoning is that when China revalues, Japan will immediately benefit. China has replaced the U.S. as Japan’s top trading partner and export destination. Japan will now be able to compete with the U.S. even better than before, and exports to China will rise.

So why, out of the blue, were there mass demonstrations and street protests against the Japanese in Chinese cities? The Chinese refused to offer an official apology, and were suspected of having engineered the whole thing. After three weeks, the Chinese were able to shut down the protests by forbidding them and also forbidding text messaging and e-mails related to anti-Japanese gatherings. Most recently, the Chinese government accused the protesters of fomenting an evil plot against the Chinese government with the protests.

Some observers point out Japan has the world’s second largest economy but China has the world’s largest population. Once China modernizes and adopts more of the free-market institutions and practices that lead to sustainable growth and social stability, it aims to be the powerhouse leader in the region, if not the world. If China engineered the protests against Japan — which caused the Nikkei stock index and the yen to crash for several days — it was to demonstrate an already awe-inspiring power that is still in its infancy. We imagine the message was not lost in Washington, either.

The Chinese revaluation won’t mean much in its own right. It won’t reflect relative purchasing power or change the overall structural imbalance represented by the U.S. current account deficit, but the other events surrounding the revaluation will reveal China’s real long-term agenda in the economic power hierarchy.

One commentator said China has the potential to replace the U.S. as the global superpower, and its currency could become the world’s reserve currency. Well, not until China adopts and observes the rule of law and the immutable principles of covered interest arbitrage. However, the reserve currency in your grandchildren’s day may be the renminbi.