Political Gridlock in the U.S. vs. Political Savvy in China

Chinese Premier Wen Jiabao
Chinese Premier Wen Jiabao

A bitter showdown between Republicans and Democrats is riveting the financial world as the U.S. midterm congressional elections approach. And American investors are getting understandably nervous that the game of chicken between the two parties could result in an across-the-board tax hike in 2011 if the combatants can't reach some consensus before all of the Bush tax cuts expire.

This dysfunctional drama in America is in sharp contrast to how events are lately unfolding in China, now the world's second-largest economy. The strength of Chinese growth has surprised many critics. And now the country's generally low-key political leaders seem to be taking a more assertive position on the world stage, but with remarkable skill rather than with bellicose rhetoric.

For investors who have struggled with the likelihood of China taking the "nuclear option" -- dumping its massive holdings of U.S. debt with the consequent chaos that would unleash -- the steady, calculating maneuvers should be reassuring.

Signaling More Accommodation

A charm offensive this week by Chinese Premier Wen Jiabao was the most recent demonstration of tact and reasonability. Wen announced plans to bolster domestic demand as part of a broader move to rebalance China's heavily export-dependent economy. He also pointed to keeping inflation in check as a key priority.

Investors should see the remarks as a signal that China may let the yuan appreciate further. The currency issue has been highly contentious, of course, and has taken on a carnival-like tone as U.S. politicians look for quick fixes to the dreary jobs situation at home.

But Wen was likely signaling a more accommodative position while sidestepping any appearance that he conceded to American browbeating. He did so by pointing to how China stands to benefit from a stronger yuan: Chinese domestic consumption should get a boost, while inflationary forces should be checked by a rising currency. That should make the bitter pill of a higher yuan for easier for China's export sector to swallow.

Lending Greece a Hand

China melded the quiet currency concessions to the U.S. with loud overtures to the European Union, a major American economic rival. Wen affirmed China's commitment to the euro and to European bonds, despite the Continent's financial strains.

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He also said China would buy Greek bonds when the country returned to capital markets and would be supportive of Greece's shipping industry. Wen made the announcement in Athens -- the first Chinese premier to visit Greece in 24 years -- as part of a whirlwind European tour that underscores China's invigorated engagement.

Beijing seems to be getting the hang of the carrot-and-stick protocol favored by big powers when it comes to its own neighborhood, too. The recent sharp flare up with Japan over territorial issues, for example, appears to be getting resolved quickly following high-level diplomacy between the two countries.

The recent series of dealmaking is impressive: China has sidestepped plenty of U.S. pressure, turned to checkbook diplomacy in Europe and resolved a contentious issue with historical overtones with another major trading partner.

Selective Aggression

That trifecta is all the more striking given how modestly China often tries to present itself on the world stage. Despite China's rapidly expanding economic might, the country's top politicians frequently stress that it remains a developing nation.

Of course, this also is fairly calculated. By being only selectively aggressive, China can duck a lot of international pressure on thorny issues like providing more funding for international security or engaging more deeply on energy policy.

Still, investors should find China's more deliberate and muted approach far easier to grapple with than the grandstanding in the U.S. American politicians never tire of pointing to American exceptionalism or the country's superpower status. But when it comes to the basics -- like finding consensus on tax policy -- the situation tends to be far more disappointing.