BEIJING - While the rest of the world is in crisis, China's gross domestic product (GDP) is growing at 10% a year. Beijing knows it must pick up the bill for speeding and also help others in difficulty, something that will start a positive sum game for the whole global economy. But how its contribution should be counted and billed is an open question.

The focus at the Group of 20 (G-20) summit in Paris last week was to find a mechanism to measure and monitor global economic imbalances and thus to intervene in a timely manner. Beijing, however, did not agree with the proposed indicators – real exchange rates and monetary reserves, since both pointed at China.

With US$2,700 billion, China owns about 40% of the world monetary reserves (beyond $7,000 billion in total). Moreover, its currency is widely considered undervalued in real terms. Therefore, Beijing should intervene in its economy, immediately appreciate the yuan and lighten the reserves.

Beijing wants gradual steps: The yuan has appreciated 26% on the dollar in the past five years. This year there should be further moves upward, but the government needs to give time for its domestic market to grow and make up for the drop in exports, and it doesn't want flows of speculative funds that could trigger spikes in inflation.

Monetary reserves grew out of the need to sterilize the trade surplus, but also from the experience of the 1997-98 Asian crisis, when the world wanted to devaluate the yuan and China resisted.

Beijing then saw that the great wall against speculation was its system of fixed exchange rates and was bolstered by its ability to intervene in support of the Hong Kong currency with its already then massive reserves. Today, as the Chinese exchange rate is partially free, Beijing believes it needs greater reserves.

Yes, its reserves are now too large. However, present measures to partially offset trade imbalances, by increasing domestic investment in infrastructure, health care and education, should help to shrink them.

Therefore, China would like to foot its bill by addressing what it sees its root problem - the trade surplus. In recent months, Beijing has been reducing its surplus. Moreover, a trade surplus is not an exclusive Chinese problem; Germany and Japan have similar if not greater issues.

For China, it is a battle on two fronts, one external, the one in Paris, and one internal.

China has a strong lobby of export manufacturers, often private entrepreneurs, who fear bankruptcy or drastic thinning of profits under any revaluation. Because of a drop in exports and greater internal intervention (health, education, infrastructure) in sectors dominated by state-owned companies, the economy is changing dramatically, weakening the weight of the private sector and increasing that of the state - contrary to the direction of reforms over the past 30 years.

These private interests can marry a nationalist rhetoric accusing the government of expanding in the economy while yielding to foreign pressures and desires. The current slogan for private sector difficulties is "guo jin min tui" (the state advances, the people withdraw). However, the Chinese people cannot withdraw simply because 19 countries ordered it to do so in Paris. This would be too similar to the onslaught of China's colonization at the beginning of the past century.

Moreover, there is one more element. Making China an export base helped the country move up the technological ladder, as foreign companies brought better technology to China, and thus helped improve the overall quality of industry.

Now, China has the money but there are still many restrictions on how Beijing can use it to buy the foreign technologies necessary to further improve its industrial base. Revaluation would dry up the possibilities to draw on foreign investment as a source of innovation, while it is not certain what the appreciated money would be able to buy abroad.

Lastly, Beijing, with a GDP that is still a third of that of the US, knows it doesn't have the strength to haul the world. Therefore, drastic measures on exchange rates and reserves might help other countries, but at the cost of jamming China's engine.

Also, two experiences are pushing China to cut a path of its own. In the 1980s, Japan revalued the yen due to pressure from the US and consequentially went into a crisis. Ten years later during the Asian financial crisis, China did not cave in to such demands and saved itself and the region from a cycle of competitive devaluations.

However, 13 years ago Beijing had the political support of all of Asia, today it is alone. Its exports, armored by a light yuan, hurt the European and American deficits, but are also competing with those of other emerging countries, such as India and Brazil.

China's interests now, and in contrast to the end of the last century, are not aligned with those of the world or at least a part of it. In 1997, China, by defending itself, was defending Asia; today it is aligned only with other large exporting powers, like Germany and Japan.

Meanwhile, a reduction of the surplus plus shrinking reserves could in time weaken or break the virtuous circle that bound the US and China together. China bought US Treasury bonds, the US used that borrowed money to buy Chinese goods and invest in China, something that provided China with the cash to buy more bonds. This flow is the backbone of bilateral ties. If this circle is weakened or broken, what else could hold together the long-term ties with America?

This objective political solitude is, perhaps, China's greatest risk today. And in this solitude other episodes take on larger political significance.

Hours after the end of the G-20 meeting in Paris a call was launched through the Chinese Internet for a "jasmine revolution" that was not clearly defined and devoid of any specific political objectives. The protest was largely averted and defused by the sudden intervention of the police. Still, hundreds, if not thousands of people responded to the call by assembling peacefully in the agreed central areas in 13 major cities.

On February 22, the US Air Force proposed to spend $3.7 billion over the next five years developing a new, stealthy, long-range, manned bomber likely intended to penetrate Chinese air defenses. These could be the warning shots of a new major confrontation with China for its 2010 hubris.  (2011-02-24 Asia Times)