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China is Not the Problem, It's a Symptom

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The vote by the U.S. Senate to proceed with sanctions to "punish" China for its currency policy is hypocritical and is a further sign of Washington's inability to deal with U.S. economic problems. It is the tendency of our politicians to blame foreign countries for corporate America's inability to compete in the global arena. The endorsement of that thesis by Fed Chairman Bernanke is one more sign that the Federal Reserve is in the wrong hands. At least the US Senate can be partisan when it comes to sanctioning foreign countries.

We have been witnessing a massive relocation of the Western world's production capacity (not just the U.S.) in the direction of emerging markets. It is the result of, and motivated by, the search for profit by Western global companies. They intentionally decided to produce outside of their home market for cost reasons. Blaming China for the ensuing substantial balance of payment surplus is hypocritical.

Are we willing to pay the price for even a limited relocation? Could Apple sell its iPad if it was not partly produced by Foxconn who runs a modern version of a labor camp in China, where 300,000 Chinese workers are cramped on one single location?

We are now seeing a trend towards the reduction of exports by China. However, this is not translated into a drop in imports into China. The only explanation is that, quite naturally, China is at last producing for its domestic market. It is in fact good news both for us and for China. Are we witnessing the first signs that Chinese households are saving less and will join the consumption society? It is too early to draw that conclusion.

With $3,200 billion of foreign exchange reserves, China is the world's largest lender. Not only does the US Government depend on it to finance its deficit, but Europe, more than ever, needs China to invest in Euro denominated assets.

The Yuan increased by 7% this year. Asking for more is not reasonable, especially since the United States have once again neglected the value of the dollar and systematically weakened it. China is losing that 7% every year on its US Treasuries! It is an annual loss of $80 billion! A debtor cannot request a weakening of its debt from its creditors.

We should expect globalization to level off substantial economic differences. The Chinese live on $4,000 per inhabitant. The number for the United States is $ 45,000. This is not an entitlement.
It is perfectly legitimate for China to care about its population. I urge everyone to read Wen Jiabao's speech at the WEF in Dalian last month. The Chinese have chosen to prioritize the welfare of their population. Who can argue with that?

Blaming China is everybody's game. It is a repeat of the United States' Japan bashing. The decision of the US Senate yesterday to "punish China" completely ignores our responsibility in the current situation. It is of course more convenient politically to blame China than to confront corporate America.

We need to get our house in order. Blaming others for our own fiscal indiscipline will not reduce our debt. The West is cruising for slow growth and needs emerging markets to prosper. From the Arab world to the Wall Street protesters, we are seeing a generation who resent our lifestyle based on debt. Our pension problems are insurmountable.

We are at the beginning of a new sharing of power in the global world. We should accept it with seriousness and a sense of responsibility. The alternative is protectionism and war. We are also at the dawn of a new definition of the financial planet.

China is not the problem, but a symptom of the difficulty of corporate America to compete globally. We must invite China to become part of the solution. It is in both of our best interest. And ultimately, it is the right thing to do. As The Economist put it in its front page, until politicians actually do something about the world economy BE AFRAID. Washington has become frightening: whatever the issues are between the US and China, the Senate's move will only exacerbate the situation and produce no results.