[Viewpoint] Currency accord? In your dreams

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[Viewpoint] Currency accord? In your dreams

Of all the things U.S. Secretary of the Treasury Timothy Geithner expected when taking his current post, examining a periodic table likely wasn’t one of them.

But obsessing over chemical elements is exactly what Geithner and his staff will be doing in the months ahead. The New York Times reports that China is quietly halting shipments of crucial minerals to the U.S. and Europe, after doing the same to Japan, and it’s a big deal for politicians and investors alike.

The news trumped China’s surprise decision to raise interest rates this week. It’s a sign that economic cooperation is becoming a quaint concept as China’s clout increases. It’s also the latest reminder that anyone betting on a Plaza Accord-like currency deal next month is dreaming.

China’s policies on the yuan and rare earths are more connected than what meets the eye, and both contain the same message for the developed world: stop whining and get on with Plan B.

Hedge-fund managers are damaging the G-20’s chances of getting China to boost the yuan. At a conference hosted by Bloomberg Link in Hong Kong this week, I didn’t meet a single hedge-fund manager who expects big news out of the G-20 meeting in Seoul next month. Nor did I meet any mangers who think China will reconsider its evolving policy of rationing out the raw materials vital to everything from hybrid cars to laptops, weapons and iPhones.

China’s currency is an obsession of the economic community. From Washington to Tokyo, the talk is about prodding China to revalue its currency as the 1985 Plaza Accord did with the yen. It is seen as a crucial step in reducing the biggest imbalances plaguing the world economy - an argument China isn’t buying. As a developing economy with a mostly poor workforce, China sees an undervalued currency as a necessary evil.

Similarly, China appears to view its control of about 97 percent of production of rare-earth materials as an advantage that is too good to pass up. On the one hand, it needs lots of those minerals to feed its growth. On the other hand, it is finding this monopoly to be very useful geopolitically.

The world has a choice here. It can complain and stomp its feet in a futile attempt to get China to reverse course, or it can accept the reality of our new world order and adapt. The U.S., for example, is free to retaliate with tariffs on Chinese imports. Yet protectionism is no wiser an option today than it was in the 1930s when the Smoot-Hawley Tariff Act deepened the Great Depression.

Americans should accelerate efforts to create fresh jobs and educate a workforce that is becoming out of step with the direction of the world economy. And besides, Geithner could always beat China at its own game and aggressively devalue the dollar if he wanted to.

The rare-earths issue is more complicated. Japanese officials say such supplies have been restricted following a dispute between the two countries over a Chinese fishing-boat collision with Japanese Coast Guard vessels last month. China sees fit to provoke international laws so long as its 10 percent growth isn’t threatened. While it’s not right, it is what it is.

The rare-earths story shows how the battle against global warming is turning into a real blood-and-guts fight for dollars and jobs. A new report commissioned by Australia’s Climate Institute shows China as a surprise leader in the pursuit of clean energy. China is second only to the U.K. in offering incentives to cut pollution created by electricity generation.

As the world’s top polluter, China should be redoubling efforts. Yet China will be installing thousands of wind turbines, all of which will need rare earths. China isn’t just working to improve its air quality - it’s investing in the next generation of jobs.

Industrial evolution always leads to structural shifts in commodity consumption. We had the Stone Age, the Bronze Age, the Iron Age and the ages of aluminum and copper too.

Technology’s current obsession with miniaturization will accelerate the need for alternatives to rare earths, creating more business opportunities and investment choices for hedge funds as well.

It’s fascinating that a developing country has a chance to lead the next industrial phase by controlling the necessary raw materials. It’s not clear this has even happened before, and it’s a reminder of how upside-down the global economy is today.

*The writer is a Bloomberg News columnist.

By William Pesek
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