Here is an interesting article courtesy of the Financial Times on Olin Wethington, the new “Currency Envoy” to China. For analysis click more. Hat-tip: The Fourth Rail

Olin Wethington, an aide to John Snow, US Treasury secretary, will take on the role with the mandate of persuading the Chinese government to act promptly and allow its currency, which has been pegged to the dollar for the past decade, to rise.

Why are we doing this again? Oh yeah that is what the prevailing political wind seems to indicate we should do. Economic reality be damned. There is an excellent argument that we don’t want China to float the Yuan, the idea being that it would end up biting us in the ass. Larry Kudlow of National Review expalins it perfectly.

Treasury man John Snow insists on floating rates worldwide, but he forgets that emerging-country currencies don’t float — they sink. Aren’t we yet persuaded that nations cannot devalue their way to prosperity? Or that currency stability is better than currency chaos?

Let’s forget that for a second. There is a good argument for a revaluation while maintaining the dollar peg with long-term plans for a floating Reminbi. That appears to be the path that Wethington has been asked to pursue.

Mr Snow has also sought to clarify US demands, saying Washington was not calling for “an immediate full float” but instead that China should take “an intermediate step that reflects underlying market conditions and allows for a smooth transition when appropriate to a full float”.

You want the Chinese to start doing something about 8.27 Yuan to Dollar peg? Shut up about it. The Chinese have wanted to move the peg now for at least half a year. The problem is that they can’t. Underlying economic conditions in China strongly suggest that a strong Yuan would help to curb the inflation that has been a natural result of the raging economic growth taking place on the mainland. Political realities have forced China to delay this move. A year ago the Chinese government worked with the Chicago Mercantile Exchange to look into what a Yuan float would mean. The Chicago Mercantile Exchange is where currency futures are traded for those who don’t know.

The reason for the seemingly illogical delay has been the constant rhetoric in the western media about China’s need to revaluate the Yuan. The CCP will not allow it to look like they have bowed to Western (especially American) pressure on a matter as important as its currency. There are two reasons for this: face and politics. The Chinese are not going to allow the Americans or anyone else for that matter to tell them what to do, nor will they entertain their suggestions. To do so would indicate a relationship of superiority, not something any Chinese ruler has lightly allowed. The political aspect concerns China’s relationship with its citizens and China’s current leaders’ relationship with factions within the government that would exploit any visible concession towards the Americans and the West as a weakness that could be used in the constant behind-the-scenes power struggles of the oligarchy in Beijing.

Beijing must appear strong to the people. If the central government doesn’t appear strong then order begins to break down across the country and local power brokers begin to wield more influence than they ought to. The currency issue won’t make or break this balancing act, but it is one of many issues that the CCP makes sure it looks like a 500-pound gorilla on. The younger people in China are extremely nationalistic and fairly ignorant about the rest of the world. This is obviously a caustic combination that’s dark side can best be viewed in the anti-Japanese riots of late. China has to appease them when possible to maintain their continued loyalty to the state. If this younger generation begins to feel that the CCP is the principle obstacle to China’s “proper” grandeur and majesty then they would have serious social disorder to deal with.

Conclusion? If you want China to revaluate the Yuan or to put forward a schedule for its eventual float, then shut up, stop talking about it with every journalist you meet, and for God sakes please refrain from this:

John Snow, Treasury secretary, made clear when he released the department’s twice-yearly report to Congress on exchange rates and trade this week that China was likely to be named a currency manipulator if it did not revalue the currency within six months.

If the White House drops the issue, slowly but surely everyone else will too. Behind the scenes negotiations can be as furious as you like. If you let them, the Chinese will pursue a surprisingly pragmatic course.