Chinese Economics and the USA

The FT had an interesting article about monetary policy in china and it's effects on the us economy.

There were 2 things that caught my eye. The first was to do with the Chinese argument that the lack of competitiveness of the US had more to do with it's inability to keep up with the pace of change in world supply structures than with Chinese currency manipulation. This is probably at least partially true, given that US companies have outsourced most of their manufacturing process to cheaper labour countries, effectively only leaving the creative, assembly and retailing part of the supply chain at home, which are probably the ones that employ the least people. Moreover prices are higher in the US which means workers will only accept wages above a threshold considerably superior to their Chinese equivalent.

The second thing that caught my eye was that apparently when pressed to increase the exchange rate Wen Jiabao the prime minister of china said that the appreciation of 20% would lead to increased bankrupcy, unemployment and social unrest. This is interesting because it is what we are experiencing in Europe. However because we have a liberal democratic political system, it can take the pressure, absorb the social unrest and move on. What Mr Wen is effectively saying is "you guys in the west should take the heat, because if we have to the structure of our society will crumble and it will bring down our economy". Should this be relevant? Of course! If for no other reason self interest should keep us from pushing china to appreciate its currency overnight. But China can't expect us to take the heat forever just because Chinese politics are experiencing a bubble. There's too much support for a system that cannot survive in the long run. That support is itself fuelled by an economic bubble where exports are too cheap and the interest rates arent high enough. The point being that it's an economic certainty that the economic bubble will eventually pop, potentially popping the political one along the way. Thus the Chinese should themselves initiate reform, slowly and progressively so that within some span time they can accommodate this type of unpleasant decision without fearing total societal collapse. If they don't, then let's hope Wen was wrong and that civil unrest will not ensue when a bubble inevitably pops.