China's arrogance revealed (again!)

China hit back at the international criticism on yuan policy.

China stiffened its opposition to a rapid appreciation of the yuan, setting the stage for a confrontation over exchange rates at this week's international monetary meetings in Washington.

Premier Wen Jiabao said China will stick to its policy of gradually increasing the currency's flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.

"Europe shouldn't join the choir" clamoring for a higher yuan, Wen told a business conference yesterday before an EU- China summit in Brussels. "If the yuan isn't stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil."

It's nothing new that China retaliates its claim to let yuan appreciate gradually, not faster or by outside pressure. But I find something different in Wen's words.

Wen is behaving very arrogantly.

That's the same as what I saw in the dispute between Japan and China over Senkaku Islands. Japan released a Chinese captain earlier, but China kept 4 Japanese into custody. China is pushing their national interest boldly and bluntly, taking the world economy as a hostage. His words prove it.

This year, yen rose more than 10%, bearing the brunt of fierce market force along with India and Thailand. It isn't surprising that the Japanese did something to stop it. 

Martin Wolf of FT is very straightforward.

Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

We have to address four questions. Is China a "currency manipulator"? If it is, does it matter? What might China reasonably be asked to do? Finally, can other countries shift China's policies, with limited collateral damage?

The first question is the easiest. If a decision to invest half a country's gross domestic product in currency reserves is not exchange rate manipulation, what is?

Then, what should we do to stop  China's manipulation of its currency?

... Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington's Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets. This idea would also make the Bergsten plan more effective.

Reciprocity. That's what a Japanese politician (I forgot his name) mentioned when he was asked about China's purchase of JGB.