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Thursday, Oct. 5, 2006

When in China, just follow the power


WASHINGTON -- It's evident to the smart people here that there's a whole lot of shaking going on in China right now. It is hard to hear it or feel it above the desperate din of the tragic blunder of the Iraq invasion, but it is happening nonetheless. And when the shaking is over, China may not be quite the same place as before.

First there is a political struggle.

Chinese President Hu Jintao and his Beijing faction have turned their attention to their predecessor's famous faction -- the Shanghai gang led by former President Jiang Zemin -- with breathtaking vengeance. Party leaders are being rounded up and interrogated on questions of corruption. Few of them are likely to see the light of day ever again. If the sweep is complete and successful, the transformation to the Hu Dynasty will be complete and final.

The effect should be felt not only within the corridors of Communist power but all across the land. It is scarcely inconceivable that the purge could spread into every province, city, village and backwater of China. The purge agents will not be pre-pubescent Red Guards out of control, but trained investigators and prosecutors who know exactly what they are doing, in part because they have been told exactly what to do.

In the end, will China be a better, freer, more open society?

To judge by the tightening and censoring actions of the central government over the last several months, one would not think so. The centralizing of power would not seem to lend itself to the blooming of a thousand lovely flowers of gently competing thought and philosophy, but more to the constriction of a new giant weed strangling all competitors.

But if the losers of this power purge are the Chinese people in general, not to mention the Shanghai faction in particular, there could be unexpected winners. Among them are those in the West, particularly in the United States, who have been calling for China to revalue its currency.

The economic theory behind this is that the Beijing faction will accelerate the process of giving China's currency greater value. The net effect -- at least as U.S. revaluation rooters argue -- will be to bring down over time the great, overarching imbalance of trade between China and America.

Revaluation boosters have been arguing for years that by suppressing the yuan, Beijing has in effect been subsidizing its exporters and handicapping domestic U.S. manufacturers who have to price their goods at the market in relatively over-valued -- and thus less competitive -- dollars. The economic argument here is that a $10 scarf ought to cost $10 in actual money -- not $8 if it's made in China because the yuan is kept artificially cheap against the dollar.

And so let me go out on a rather long limb and predict, more or less categorically, that China will significantly revalue its currency, as long urged by Washington, and most recently by U.S. Treasury Secretary Henry Paulson.

In quiet but long talks with the Chinese, the former head of Goldman Sachs has been pressing the case that taking the handcuffs off its currency was in China's own best interest. His is a fair argument, but it is at least as true from the political perspective as from the economic one that Paulson has been yammering about.

"China will revalue," says a widely respected international-trade expert with several clients who are doing deals with Beijing. "They have tried everything else to get control. There is now only one other option."

China's economy has gotten so hot that even Beijing's handlers might not have thick enough gloves to be able to get a grip on it. In fact, they may be in danger of losing complete control, and loss of control is not the first thing that Communist leaders in Beijing wish for when they awake each morning.

Just as they are working daily now to get the Shanghai faction under control, they will begin to change monetary policy to get the economy under control. To this end, they will deflate their competitors in Shanghai, and "reflate" their currency internationally.

Make no mistake about it: They are doing this not because it is right or good, but because it will give them more control and power.

In America it's vital to follow the money if you want to understand the politics. That's somewhat true in China or anywhere else, indeed; but in China, the most sagacious course is to follow the power if you want to understand the Chinese. And, right now, the power flow is flowing in the direction of Beijing.

UCLA professor Tom Plate is a member of the Pacific Council on International Policy. Copyright 2006 Tom Plate


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