China Draws the Lines

Now that all of the state visits are over, Wen Jiabao, China’s premier, drew some pretty clear lines in the sand regarding China’s currency and climate change policies. Speaking at the conclusion of the EU-China summit in Nanjing, Wen said: “Some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.”

That’s pretty clear. In other words, China will keep its currency pegged at about 6.8 to the U.S. dollar until it is certain that the dollar has ended its decline. Otherwise, any appreciation of the yuan against the dollar results in an automatic decline in the value of China’s $1 trillion portfolio of dollar-based assets.

While European economies are the main victims in this currency death-spiral, they should not expect much relief. China will counter any criticism of its currency policy with its own complaints about trade protectionist measures that both the United States and the Europeans have taken. That is why I believe that the tariff on Chinese-made tires that was levied by the Obama Administration earlier this year was such a mistake. China can now take the high ground on any trade and currency issues.

China has also done a masterful job of taking the high ground on climate change. Heading into Copenhagen, its position is very clear. Wen said China was “solemn and serious” in its vow to cut the amount of carbon dioxide emitted per unit of economic output 40-45 percent by 2020 compared with levels in 2005. “But developed countries must lead the way in climate change talks next week in Copenhagen, and provide finance and technology to developing countries such as China, to tackle global warming,” he said.

In case some missed Wen’s point, an editorial in today’s China Daily made it crystal clear. The editorial argued that four substantive factors must be decided if the world is to have a new and workable framework on cutting greenhouse gas emissions.

These factors are: Developed countries must accept binding GHG-reduction targets for 2020, developing nations must set out the measures they will take to curb emission growth, the rich world must provide finance and transfer technology to help poor countries cut their emissions and adapt to the changing climate, and all states have to outline the governance structure that would provide the means to monitor the above three activities. To be frank, the developing nations have no cause for concern. Just last week, China announced that it would voluntarily cut carbon dioxide emissions per unit of GDP by 40 to 45 percent by 2020, taking 2005 as the base year. India, too, is taking voluntary steps to check its GHG emissions.

By now, I believe that everyone understands the difference between the “energy intensity” targets that China has committed to versus the absolute declines in carbon emissions that developed economies like the United States are expected to embrace.

Hmm. So let me get this straight. The United States, with an already staggering national debt and $1 trillion budget deficits for “as far as the eye can see,” must provide financing and technology to developing countries like China to help them meet their carbon emission targets. How do President Obama and House Speaker Pelosi plan to convince American voters, who are facing 10.2 percent unemployment, increased taxes to pay for large deficits, as well as higher energy costs as a result of agreements their leaders might make in Copenhagen, that they should provide financing to China, a country with an economy growing at 9 percent and almost $2.5 trillion of hard currency reserves?

You have to admire China’s negotiating skill. If it pulls this one off, it will be the coup of the century.

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