Editor’s Note: The Chinese article was first published on www.zaobao.com (10/05/2011).

Recently two unusual moves were made by the U.S.

I. The U.S. Congress passed the currency exchange rate surveillance Reform Act directed at the RMB exchange rate. Many people may think that my calling it an unusual move is a little ridiculous. But this year the RMB exchange rate bill may pass in the House or may become direct economic confrontation. Therefore I call it an unusual move. Also, the bill of this year may be called the tool used by the U.S. to divert domestic public dissatisfaction. The Wall Street protests that have continued for nearly a month risk expanding and spreading to the entire country. Although the U.S. Government frequently blocked the news and silenced the demonstrators by force, it cannot release people's emotions. Demonstration vents dissatisfactions with the financial capitalists, and if allowed to spread, it is likely to tap more discontent and lead to social revolution. Stability is a necessary condition for social and economic development. If social unrest is about to occur, then, even if there is direct trade war with China, the overall loss appears to be smaller to politicians in the U.S. That is because they can shift the crisis, transfer people's dissatisfaction to China, and slander China for its low exchange rate that causes the sharp decline in jobs in the U.S. and results in a large number of people becoming unemployed. This may temporarily release the dissatisfaction of the American public. Even if the trade war with China results in certain economic losses and impacts, the U.S. politicians can still choose such a policy. Therefore I recommend that our government should be well prepared, and should not underestimate it as the same old story. Avoiding disorder caused by social unrest is the most important task in any country. Therefore, our government should be vigilant over the bill of the RMB exchange rate becoming the tool for diverting the crisis.

The aspect of the U.S. RMB bill that we should particularly watch is the comments made by the U.S. domestic media, that is, the U.S. public opinion. If the U.S. crisis assessment concludes that a direct trade war of small scale with China does not produce big harm, it is likely that the RMB exchange rate bill will evolve into a small-scale trade war. In the U.S. consideration, this is controllable, because the U.S. has the confidence to influence the thinking of the Chinese brains. The development of the exchange rate bill depends on the results of the crisis assessment and the evolution of the U.S. protests. If the protests worsen, then the U.S. politicians could disregard the survey results to launch a trade war. If the risk assessment of a trade war with China concludes that the risk is very small, the U.S. is still likely to launch an exchange rate war. This is the unusual move that I want to explain. It is better that we have a prepared plan for protection.

II. Recently the U.S. dollar soared. The dollar index rose from around 75 to above 78 at present. The dollar rose sharply against the euro, the sterling, the yen and other major settlement currencies, which revealed additional information. It explains that, were the U.S. dollar not dumped by many governments, then there would be difficulties in selling the U.S. Treasury bonds or many cases would be encountered in international trade of refusing to make settlements in U.S. dollars. In short, the recent dollar appreciation must be the U.S. Government’s tactic to solve the dollar crisis and maintain the dollar’s central position, because dollar appreciation is not the recent fiscal policy of the U.S. Government. Only a dollar depreciation can alleviate the current deficit crisis of the U.S. Doing it the abnormal way is an unusual move.

It is not necessary for us to probe the causes of this unusual move, as long as we know or can determine its trend, and have plans ready. We must no longer have the idea that saving the U.S. saves China. Since the U.S. is not moralistic on arms sales to Taiwan, we therefore have the right to obstruct to teach them lessons.

The effectiveness of the U.S. raising the dollar exchange rate has benefited from the multiple increases of the reserve ratio of our bank deposit. Raising the reserve ratio of the bank deposit limits our bank lending capacity and also limits the path of our corporate funding. Although this has recovered some of the currency in circulation on the market, it also leaves insidious threats to the economic development. Many small and medium manufacturing enterprises face closure because of lack of funding. The lack of funding of Chinese enterprises also enables the international commodity prices to be significantly reduced in tune with the U.S. wish to reflect the dollar appreciation.

So, in order to teach the U.S. a lesson and to help our domestic small and medium enterprises, our central bank must introduce lending policies of additional liquidity in time. On the surface, the relaxation of lending policies of liquidity will result in increased money supply in the market and cause inflation. But if we consider the actual result, it may be different. We know that at present the international goods are at the stage of their lowest international prices. If the companies have access to credit funds, they for sure will purchase raw materials in big order to prepare for future price increases in raw materials. Therefore, the monetary policy of our country can partially impact U.S. monetary policy and disrupt the effectiveness of the U.S. currency manipulation. If the U.S. wants to lift its currency value, we can go against it, and we can release the excess dollar reserves. Because the eventual purchase made by the RMB loans acquired by many enterprises will be spent in imports to reduce the dollar on our hands.

Some financial experts may say that we are silly to watch the U.S. dollar appreciate and to try to fight against it. In fact our behavior is not stupid. Because dollar depreciation is a long-term trend and people who understand a little bit of economics would understand this. Although the present dollar rebound avoids losses in our books, sooner or later there will be real losses. Now, we should deal with the U.S. dollar in our hands by appropriately selling the excess dollar assets at their maximum values and convert them into reserves of raw materials needed by our country and enterprises. How can this be a loss? Instead of waiting for the gradual devaluation and loss later, it is better to be decisive and turn the excess dollars into materials. First, it can undermine the effectiveness of the U.S. dollar uplift. Second, it can help companies gain a competitive advantage. Third, it can lay the foundation for the future internationalization of the RMB. Why not do it?

The relevance of a dollar appreciation is important and we must grasp the opportunity accurately. If we foolishly fantasize about a continued dollar appreciation in the future, then we will lose the current excellent opportunity of reducing the excess dollar reserves on our hands. These excess reserves in the form of the U.S. Treasury securities will become useless "IOUs."

To properly rival the U.S. will help to change its attitude.  To blindly condone and indulge the U.S. will make it worse.  Previously we had politicians who went to the U.S. for appeasement, but this resulted in a more ill-tempered and more reckless U.S.