Another Little Word

This report of the Plunge Protection Team's visit to China contains news of another interesting choice of words by Federal Reserve Chairman Ben Bernanke. It seems that in monetary circles, the virtual peg of the Chinese currency to the dollar is viewed as a "subsidy" - that is, up until the time that Hank Paulson at Treasury finds out about it.

Bernanke, in a speech Friday after the conclusion of the talks, backed away from calling China's currency a subsidy for its exports. His written remarks, released before his speech at the Chinese Academy of Social Sciences, contained three instances of the politically charged word "subsidy."

The Fed described Bernanke's changes as "spontaneous," but observers speculated that he may have been advised, possibly by Paulson or his staff, to drop the term.

"Once you talk about subsidies, it escalates the debate," said Oded Shenkar, a management professor at Ohio State University and author of "The Chinese Century." "It's kind of an accusation," he said, with political and legal implications.

Chinese officials reportedly agreed in broad terms on the need for greater liberalization over time but declined to be pinned down to a timetable even as they acknowledged ongoing differences between the world's largest and fourth-largest economies.

That such differences remain is understandable because the actual situations of China and the United States are completely different," said Vice Premier Wu Yi.

China's leadership is wary of moving too quickly in light of the shaky banking system, growing wealth gap and mounting concerns about social instability.

Well, they should be wary given what happened the last time an emerging economic powerhouse in Asia agreed to let their currency strengthen. It was the Japanese Yen and the 1985 Plaza Accord resulted in it strengthening by more than 50 percent against the U.S. dollar in a period of just two years.

This augered in one of the most horrific booms and busts the world has ever seen and Japan has still not recovered after fifteen years. It's not likely that the Chinese will repeat this mistake, despite what a bunch of smart people from Washington tell them.

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A double shot of cartoons from The Economist.