China Bails as Germany Declines to Bail. Will America Bail?

The Chinese government is conducting stress tests on over 1,000 Chinese companies to ascertain how a rise in the value of China's currency, the yuan, would affect them. See http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahhhMkrA.A.I. This happens at a time when the U.S. and other countries have complained about the strength of the yuan. Members of Congress have threatened to take action against China (although given Congress' record of alacrity on legislative initiatives recently, the Chinese would hardly be quivering in their shoes).

Nevertheless, it is potentially significant that China's government is scoping out the impact of re-valuing the yuan upwards. Americans and other non-Chinese shouldn't delude themselves that their complaints have much to do with China's apparent inclination to re-value. China's economic policies are driven by internal concerns. While the Chinese government hardly is a paragon of transparency, there's probably an overriding reason why China might now re-value the yuan. It has no good investments outside of China for future trade surpluses. The dollar, overall, has dropped during the last decade and can be expected to keep sinking. The Euro is suddenly looking shaky, with the recent surge of EU sovereign debt problems, hinky national accounting systems and preposterous posturing substituting for a solution. The yen offers low-yields and doesn't have attractive long term prospects, not with Japan's massive government debt.

The yuan, by contrast, is likely to be a good investment. Although there is currently a bubbly froth in China's real estate and credit markets (sound familiar?), the People's Republic remains on an upward long term trajectory. By raising the value of the yuan, the Chinese government reduces China's trade imbalances and the cash surplus it needs to recirculate to other countries. U.S. imports to China may rise, although you can bet China's government intends to encourage Chinese companies to redirect their attentions to domestic markets. Throughout the last 30 years of modernization, the Chinese have quietly made a priority of economic self-reliance, encouraging Chinese companies to improve technological applications and productive efficiency, with the goal of competing against and ultimately supplanting foreign companies selling in China. If the yuan is re-valued upward, China's push for self-sufficiency will intensify, and probably enjoy considerable success. Then, the Chinese government will look smart for investing in the yuan and bailing on the currencies of stagnating foreign nations.

Meanwhile, back at the ranch, the EU is starting to look less unified. The French have stepped forward and argued for an explicit bailout of Greece. The Germans, no doubt irked by the fact that France's gallantry would be funded by Germany's wealth, have intimated that perhaps Greece should depart the EU in order to pursue other opportunities (or something to that effect). On a subliminal level, it's disquieting to see France and Germany disagreeing over a nation in the Balkans. At least this time, neither stormtroopers nor poilus are on the alert.

Nevertheless, the Europeans seem to be drifting back toward the dynamics of continental relations in the early part of the preceding century, when nations seemed simply to misunderstand where their neighbors were coming from. France's President, Nicholas Sarkozy, by proposing a concrete bailout plan for Greece, was inviting Germany's Chancellor, Angela Merkel, to commit political suicide. Seeing as how Merkel worked her way up the political ladder to become Germany's first female chancellor, self-immolation isn't likely to be in her playbook. While the French electorate is surely applauding Sarkozy's efforts to allocate some of Germany's wealth to Greece, Germany's electorate will only encourage Merkel to flip Sarkozy a pelican, or something like that. This isn't likely to end in a cozy circle with everyone roasting marshmellows and singing Kumbaya.

Greece has threatened to go to the IMF for assistance if the EU doesn't soon come up with a concrete bailout plan. The Germans shrugged. Without German participation, there will be no EU bailout plan because France and other pro-bailout nations have only the courage of Germany's convictions.

Thus, it may pass that Greece goes to the IMF. That's when Greek prime minister George Papandreou's quiet visit with President Obama last week may acquire greater significance. While next to nothing has been said publicly about the purpose and outcome of that meeting, it wouldn't be a surprise to see an American contribution to the IMF not long after Greece applies for help. After all, doughboys and GIs twice went over there to solve Europe's problems. Greenbacks may have to make the same trip soon.