The Paulson & Bernanke show

TOKYO: To underscore how serious he is about pushing for change in China, Henry Paulson is employing a powerful prop: Ben Bernanke. As The New York Times reported last week, US Treasury secretary Paulson is enlisting Federal Reserve chairman Bernanke to partake in an unusual US delegation to China next month. It’s meant to increase the pressure on China to open its economy, let its currency rise and crack down on piracy.

Paulson’s move isn’t as new as it seems. He may work for President George W. Bush, though Paulson’s strategy here is rather Bill Clintonesque. Former Treasury secretary Robert Rubin used then Fed chairman Alan Greenspan in similar fashion in Asia in the late 1990s. Even so, it’s nice to see the Bush administration trying something different. The real issue is what Paulson’s use of Rubin’s playbook says about the direction of US-China relations in the final two years of Bush’s presidency.

Perhaps Paulson wants to keep newly empowered Democrats from zealously going after a nation holding $340 billion of Treasuries. Maybe Bush noticed how the US was almost an afterthought at the recent Asia-Pacific Economic Cooperation summit in Hanoi and wants to get back in the Asian game. After all, zooming off to Beijing with such a high-level delegation is a sign of enormous respect for the ascendant Chinese economy — something China isn’t used to from Bush’s team. It may be just a coincidence, but it comes as China’s currency reserves reach the $1 trillion mark.

There are four big questions raised by the Paulson & Bernanke Show soon airing in China. Do the two most powerful US policy makers have a united front on China? Is Bernanke getting into dangerous waters outside his domain? Will the Chinese, flush with recent diplomatic successes in Asia, Europe and Africa, even care about what the US has to say? How much will the US have to give China in return for action?

The first question is hard to answer. While The New York Times report noted that Bernanke isn’t expected to join with the Bush administration in applying direct pressure on China, who believes that? It’s possible that Bernanke, like Paulson, is growing concerned about trends in the No. 4 economy. China’s rickety financial system, speculation in its asset markets and worsening pollution should worry investors around the globe.

If so, Bernanke’s presence can add some gravitas. It’s not that Paulson lacks stature, but after the missteps by his predecessor, John Snow, Paulson is still working to revive the US Treasury’s image in Asia. Bernanke’s inclusion may make discussions in China more about economics than politics.

The second question is more complicated. As an independent central banker, it’s debatable whether Bernanke should be traveling to China with Bush’s cabinet members. I had the same reservations about Greenspan sitting next to Rubin in meetings with Asian counterparts in the late 1990s. At the time, Asians were engulfed in a financial crisis and skeptical of advice from the Treasury and the International Monetary Fund to tighten belts and strengthen currencies. Greenspan’s presence in the room suggested one of the world’s most respected economists supported policies that were later proven to be misguided.

It damaged Greenspan’s standing in Asia, and Bernanke wants to avoid a similar taint. The answer to the third question — will the Chinese care very much about what the US has to say? — is one that Bush may not like. While the US was preoccupied with waging war in Iraq, China traveled the globe and charmed many a national leader. The country of 1.3 billion people has secured more than free-trade deals and energy sources — it’s beginning to offer the developing world an alternative to the US.

While the US is still the major trading partner in Asia, there’s a growing opinion that China’s 10% annual expansion is more important. Chinese officials know this. They also are realising the clout that comes with playing a key role in controlling US monetary policy. China’s central bank governor, Zhou Xiaochuan, may now be the most important person in currency markets.

Again, perhaps it’s just a coincidence, but the Paulson & Bernanke Show comes at a time when central banks in China, New Zealand, Russia, Switzerland and elsewhere are moving some reserves into yen. That’s on top of central banks already shifting from dollars to euros. The US certainly wants to avoid a massive dollar-selling binge in Asia.

The fourth question — what the US will bring to the table — will be important to the Chinese. The reason: The US is hardly a standard bearer for taking its own advice to reduce global imbalances.

Yes, China deserves grief for holding down its currency. Yet, when it comes to imbalances, there’s plenty of blame to go around. Bush’s massive tax cuts weren’t matched with spending reductions, and the US needs to save more. The result: huge and unsustainable current-account and budget deficits.

As China stands taller among global economies, it will view meetings like next month’s as a negotiation, not a sermon. If the US wants the yuan to rise, China in return will want the US to stop living beyond its means — and to stop blaming China for US excesses.

The Paulson & Bernanke Show will make fascinating viewing. Let’s just hope it’s not a rerun of the Bush administration’s past missteps in Asia.