Welcome to the Whimsy-conomy, Energy Trade Edition

This entry was cross-posted on the Cato Institute's blog, Cato at Liberty.

The AP reports some bad news for anyone seeking a little security and predictability in the US and global energy markets:

Energy Secretary Ernest Moniz said Tuesday he will delay final decisions on about 20 applications to export liquefied natural gas until he reviews studies by the Energy Department and others on what impact the exports would have on domestic natural gas supplies and prices.

Moniz, who was sworn in Tuesday as the nation’s new energy chief, said he promised during his confirmation hearing that he would “review what’s out there” before acting on proposals to export natural gas. Among the things Moniz said he wants to review is whether the data in the studies are outdated. 

A study commissioned by the Energy Department concluded last year that exporting natural gas would benefit the U.S. economy even if it led to higher domestic prices for the fuel.

The AP adds that Secretary Moniz justified this delay as his “commitment” to Senate Energy Committee Chairman Ron Wyden (D-Ore.) who opposes natural gas exports and has criticized the DOE study.  Moniz’s statement comes just days after his department (quietly, on a Friday) approved one pending export application—moving the grand total of approvals to two out of 20 total applications, most of which have been sitting on DOE’s desk for several years now.
And who says the U.S. government isn’t swift and efficient?

Government sloth aside, these two recent announcements raise a host of serious concerns.  As I explained in a recent blog post summarizing my Cato Institute paper on crude oil and natural gas exports, the immediate approval of all natural gas export license applications, as well as broader reform of the system itself, is an economic and political no-brainer.  This is because the current licensing systems—and the de facto export restrictions that they create—raise a raft of economic, legal and political problems.  For example, the discretionary restrictions on exportation—reinforced by the last week’s developments—likely violate the United States’ WTO obligations and directly contradict longstanding U.S. government support for American exports and opposition to other countries’ export restrictions.

Moreover, and contrary to Moniz’s assertions, the evidence of the economic benefits of fossil fuel exports isn’t isolated to a single DOE study, but has been repeatedly and thoroughly established by government, think tanks, and industry and consumer groups.  For these reasons, there is wide, bipartisan support in Congress and the U.S. business community for immediately approving all pending natural gas export applications. The only groups that oppose these exports are the strange bedfellows of misguided environmentalists (who fear that additional exports will lead to increased fracking) and self-interested, gas-consuming industries (who want that cheap gas all to themselves, regardless of the broader economic or trade policy harms).
More broadly, these recent developments demonstrate the government-created uncertainty plaguing not only American energy producers, investors, and workers, but many other of their fellow Americans.  As I noted in February:

By depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.

In short, current uncertainty retards highly capital-intensive domestic energy investment, production, and hiring, thereby destabilizing the market and curtailing economic growth.  And what better example of such uncertainty is the surprise approval of one gas export application quickly followed by a single bureaucrat’s announcement that—in order to keep a “commitment” to a single U.S. Senator—no others will be approved until he personally is satisfied with widely-supported data that have been before his agency for months?

Unfortunately, this type of uncertainty pervades U.S. trade and economic policy.  Whether it’s bailing out Detroit and the UAW at the expense of certain private investors, or heavily subsidizing green energy through supposedly temporary tax breaks, or negotiating restrictions on Japanese auto imports as Japan’s “entry fee” into the Trans-Pacific Trade Negotiations, or implementing last-minute tax hikes or spending increases, the U.S. government seems intent on substituting the whims of politicians and bureaucrats for predictable, constitutional, free market fiscal policy.  As a result, our American “whimsy-conomy” sputters along.

It would be crazy to think that U.S. policymakers can eliminate this rampant uncertainty overnight, but they could at least begin the process by reforming our archaic and problematic energy export laws to freely permit the exportation of all energy products, regardless of type or origin.  Such a policy change would help the economy, bring U.S. policy into compliance with our trade commitments, have strong political support, and take America’s energy future out of the hands of unelected bureaucrats like Secretary Moniz.

If they can’t undertake these simple and obviously necessary reforms, the rest of the whimsy-conomy doesn’t stand a fighting chance.

Why Free Traders (and Policy Fans) of All Political Stripes Should Root for Paul Ryan

A few days ago, I examined Republican Vice Presidential candidate Paul Ryan's congressional votes on subsidies and international trade, and concluded that he had a pretty good, but not great, record.  But that unfortunate fact doesn't mean that I'm not rooting for the guy - I definitely am, and if you support better US trade policies or simply wish for political campaigns to focus more on real policy issues rather than stupid trivia, then you should too.

Regardless of your political affiliation.

In today's Wall Street Journal, the Hoover Institute's Robert Barro begins to explain what I mean by the bold statement above.  He first notes that "The level of economic commentary during the presidential campaign has not been high" - a disturbing fact that I've repeatedly lamented here.  Then, after quickly explaining the basic - and almost universally-accepted - economic truths about the overwhelming benefits of free trade (including outsourcing) and the undeniable harms of "socialistic" business subsidies, Barro discusses why Mitt Romney's selection of Ryan - most definitely not a vocal free trade zealot - matters for these issues:

With the addition of conservative thinker and budget expert Rep. Paul Ryan to the Republican presidential ticket, we can hope that the economic dialogue will become more serious. And perhaps this added substance will extend beyond the important issue of long-term fiscal reform to encompass the enduring but still crucial debate about socialism versus capitalism.

The post-Ryan political conversation thus far appears to be fulfilling Barro's hopes.  For example, earlier this week, the WSJ reported that Ryan's selection has set off a debate about the proper scope of government:

Amid growing complaints about the pettiness of American politics, the 2012 presidential campaign is turning into a far-reaching, big-picture debate over the size and scope of government.

Mitt Romney's choice of Rep. Paul Ryan of Wisconsin, an uncommonly assertive spokesman for free markets and small government, to be his running mate on the Republican ticket has highlighted the differences between them and President Barack Obama...

Until now, in a 2012 campaign bristling with negative attacks and accusations about the character of the two candidates, big policy choices have been eclipsed.

That changes with the selection of Mr. Ryan, author of detailed conservative budget plans that call for major changes to many social programs, offering voters a choice: Are welfare services a safety net, or can they breed dependency? Is Medicare a social contract with the elderly, or unsustainable and in need of repair? And will cuts in government spending hurt economic growth, or foster a more robust private sector?

Myriad stories along the same lines have emerged over the last few days, and it seems that almost everyone with a Twitter or Facebook account has seen or posted something about the Ryan plan, the budget, Medicare cuts or some other serious policy issue.  Contrast this with the last several months of soul-crushing, superficial "debates" about tax returns, Olympic uniforms, who ran Bain Capital and when, fast food chicken, dogs (on car roofs or dinner plates), and... well, you get the idea.  The level of election-related discourse has undeniably improved in the last week.

Now, I have no idea whether this improvement will last through November.  I actually think it will because both sides seem to think that the other's fiscal position is political kryptonite, but, frankly, it's not just the public budget and economics debate that has me rooting for Paul Ryan - it's what a Romney/Ryan victory would mean for the longstanding behind-the-scenes fight between policy advisers and political hacks, especially during campaign season.  As I've repeatedly mentioned here in the context of trade, that fight - one that I've unfortunately experienced firsthand - tends to go something like this:

Adviser: There is ample historical and empirical evidence showing that policy [X] is the superior  position from an economic and moral perspective.

Hack (briefly looking up from his blackberry): Umm, yeah, that's great, dude, but policy [X] polls poorly, and we're just not gonna take the risk in an important election year. On the other hand, the public just loves policy [Y], so we're gonna stick with that, even though we all know it's an inferior position.  Now if you'll excuse me, I gotta jet - need to meet [politician] at Morton's for a fundraiser.

Adviser (mumbling under his breath): I hope you get hit by a taxi.

I The adviser may or may not have said that last thing, but you couldn't really blame him if he did.  This debate plays out over and over in political offices and on related conference calls across the country: principled wonks want a political debate about important policy issues, but political consultants, armed with polls and focus group testing, are scared to death of "real" debates' repercussions and thus seek to avoid them like the plague.  So we're stuck with month-long political fights about whether Harry Reid's friend's cousin's dogsitter saw Mitt Romney's 1997 1040EZ - fights that, by displacing real policy discussions, prevent better public understanding of important issues and thus doom the political discourse to repeat its vicious cycle of vapidity over the next election cycle.

As a result, real policy solutions rarely, if ever, materialize.

This is precisely what's caused our dismal political discourse about international trade, and US trade policy has therefore suffered.  The debate over entitlement reform has faced a similar fate: the debts have mounted as the political can has been kicked down the road, and both parties' political cowardice is to blame.  With the Ryan pick, however, it appears that we'll finally have a substantive debate about the need for serious entitlement reform - an issue that, also like free trade, is politically risky but supported by ample economic evidence (see Barro's op-ed for a refresher course, if needed).  And while it's totally unclear whether a Romney/Ryan victory will actually ensure real entitlement reform, what seems clear is that it should have a serious impact on the future of America's political discourse.  If they win, the wonks finally have proof that forcing a real debate about real policy in the face of uncertain public opinion is not a political deathblow.  In short, it shows that the American people can, given the right message and the right facts, overcome their ignorance, sift through the demagoguery and vote for good policy instead of good hair.

If Romney/Ryan lose, however, the policy advisers - and the political discourse more broadly - are in pretty deep trouble for the foreseeable future.  In the aforementioned internal debate, the hacks will have not only those risky poll numbers, but also the following conversation-ending addendum:

"And you do remember what happened with Romney and that Ryan guy, right?  Yeah, that's what I thought."

And at that point, I will pack up my briefcase and move to the countryside, forever unable to turn on the TV for fear of watching yet another bipartisan assault on outsourcing or Medicare reform or whatever.  (Shudder to think.)

So I root for Paul Ryan.  He might not be the best free trader; he might not be my "perfect candidate"; and his victory might not even ensure a conservative solution to our real entitlement crisis.  But if he loses, lord help us, the hacks will have won, and our political discourse will get even worse.

And our TV-watching won't be the only thing to suffer.

Congratulations, Non-US Corporations!

Starting tomorrow (and it's already "tomorrow" in most of the world), the United States will have earned a rather dubious distinction:

[A]s of April 1, the U.S. now has the highest corporate tax rate in the developed world.

Our high corporate tax rate has long made the U.S. an uncompetitive place for new investment. This has driven new jobs to other, more competitive nations and meant fewer jobs and lower wages for all Americans.

Other developed nations have been cutting their rates for over 20 years. The U.S. did nothing....

Japan’s rate was 39.5 percent. That was just barely ahead of the U.S. rate of 39.2 percent (this includes the 35 percent federal rate plus the average rate the states add on). Japan’s rate now stands at 36.8 percent after its recent cut.

The U.S. rate is well above the 25 percent average of other developed nations in the Organization for Economic Cooperation and Development (OECD). In fact, the U.S. rate is almost 15 percentage points higher than the OECD average. This gaping disparity means every other country that we compete with for new investment is better situated to land that new investment and the jobs that come with it, because the after-tax return from that investment promises to be higher in those lower-taxed nations.

Our high rate also makes our businesses prime targets for takeovers by businesses headquartered in foreign countries, because their worldwide profits are no longer subject to the highest-in-the-world U.S. corporate tax rate. Until Congress cuts the rate, more and more iconic U.S. businesses such as Anheuser-Busch (which was bought by its Belgian competitor InBev in 2008) will be bought by their foreign competitors.

And if you think that 15 percentage-point disparity is bad, IBD explains that it's actually much, much worse when you look at some of the United States' peers:

Great Britain was to cut its corporate tax rate on April 1 to 24% from 26% and will cut the rate again to 23% in 2013.

On Jan. 1 of this year, Canada cut its federal corporate tax rate to 15% from 16.5%.

Canada's combined rate is 26% when the average rate of the Canadian provinces is added to the federal rate. Coupled with an unfettered energy development policy, Canada's tax policy creates a low-cost, business-friendly environment....

It was the final link in Canadian Prime Minister Stephen Harper's pro-growth Economic Action Plan. There is no railing against corporate greed and oil companies north of the border.

I guess it's appropriate that the United States becomes the world's worst corporate taxer on April Fools Day.  The chart above makes abundantly clear that American companies and workers have been played for fools by our elected officials.

What on earth are we thinking?

President Obama's (and Others') Clueless Love of Chinese Infrastructure Spending

Over the last few weeks, President Obama has traveled the country campaigning on the taxpayers' dime trying to sell parts of his Big Jobs Plan.  In order to sell a chunk of that plan - a massive new government spending spree on domestic infrastructure - Obama last week repeatedly cited China's infrastructure spending as the prime example of how the United States is desperately falling behind and needs to catch up:

Congress is expected to vote this week on a part of the jobs bill that would fund $50 billion for roads and bridges and $10 billion for other infrastructure projects. Obama said these projects would ease the unemployment rate, which was 9.1 percent in September, and rebuild America’s decaying infrastructure.  

“It makes absolutely no sense when there’s so much work to be done" and more than a million construction workers unemployed, Obama said, standing in front of the Francis Scott Key Bridge, which has been declared structurally deficient...  

Obama said Americans are paying nearly $130 billion a year to use bridges and roads that are out of date and unequipped to serve today’s society. He said the U.S. could be paying workers to rebuild these roads and compete with other countries transportation systems.  

Europe invests twice as much of its overall economy as the U.S. does on transportation infrastructure, Obama said, while China invests four times as much. “How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama asked.

Envy over Chinese infrastructure spending certainly isn't isolated to President Obama, or even Democrats.  Indeed, China's huge infrastructure expenditures are routinely cited by sinophobes of both parties as a clear indicator that the Chinese are eating our economic lunch these days.  For example, here's noted JapanChina-obsessive Clyde Prestowitz lamenting the disparity between the US and Chinese infrastructure budgets in his attempt to convince the American people that the US government should create an "Infrastructure Bank":

Just to maintain the current [US] transit and highway systems will take about $100 billion above current annual revenues for the next 25 years. To improve the system would take $150 billion annually. China, with an economy less than one-third the size of the U.S. economy, is spending about $1 trillion on upgrading its infrastructure. The total U.S. bill for a modern infrastructure would probably be on the order of $5 trillion to $10 trillion over the next quarter-century. That's a lot of money, and it's unlikely to come from either increased taxes or reduced government expenditures. It could, however, come from an Infrastructure Bank that could use an initial government-funded capitalization to leverage private capital on a project-by-project basis.

But don't hold your breath on this. It's not going to happen because of the policy issue.

Leaving aside for a moment the fact that the supposedly horrible state of the United States infrastructure is a highly questionable assumption, let's focus instead on the notion that China's massive infrastructure spending is something the United States should emulate.  Yes, sure, they're spending a lot of money on roads and bridges and rail lines, but beyond the sheer dollar-value, are these projects worth the money and, more importantly for our current purposes, worthy of US praise and imitation?

Well, if a high-level member of China's own planning commission is to believed, the clear answer to those questions is "no."  In a recent, eye-opening interview with Caixin, Chinese Academy of Sciences (CAS) academic and National Planning Expert Committee member Lu Dadao thoroughly explained that China's infrastructure system is rife with problems and in desperate need of reform. The entire interview is worth reading, but here are some of the highlights:

Caixin: What's the status of China's transportation construction initiative?

Lu: It's mainly about excessively big, redundant construction and unfair competition, as well as a lack of coordination between different modes of transport. First, look at expressway construction. In 2008, the nationwide total mileage plan was adjusted up to 100,000 kilometers. That year alone we built 6,433 kilometers and invested a total 600 billion yuan. Nationwide expressway mileage is expected to grow to a staggering 180,000 kilometers, if we add provincial and national building plans.

Personal vehicle traffic levels are too low on some expressways built over the past five years. Considerable stretches of expressways completed in central and western regions are usually empty, simply basking in the sun. Thus, expressway construction has suffered from excessive expansion. It's gotten out of control. Second, over-expansion for coastal port development planning and construction has clearly led to excessive competition between ports. China's port throughput capacity reached 4 billion tons in 2008, yet coastal communities continue to compete in the race to build large-scale berth and shipping container ports. Every port authority makes lofty claims about becoming a coastal or international hub for commercial shipping.

Additionally, many regional airports are being built blindly, with huge investments but no feasibility studies. This has led to major losses. In 2008, national subsidies to small- and medium-sized airports reached 9.3 billion yuan. But by 2020, we'll have added another 100 or so airports, mainly regional airports. Every year recently, construction has begun on about 20 regional airports, and more are waiting to be approved.

Moreover, there's been a surging wave of railway construction projects, including intercity rail linking big cities, suburbs and small cities in some provinces, regions and municipalities. Our research group found there will not be enough traffic to support the big, city-centered railway transportation systems after they are completed....

Currently, China's expressway network accounts for 1.62 percent of total road network mileage, which is higher than in either Europe or America. In eastern regions, the expressway ratio is as high as 2.4 percent, and in the west it has reached 1.16 percent. This sort of road network clearly reflects one fact: Expressways, which play a backbone transportation role, are mismatched against other kinds of roads. The total expressway length is too great. A reasonable expressway mileage ratio is around 1.2 percent.

Caixin: Why has China's transportation construction program been excessive?

Lu: The main cause is a lack of consideration for China's national conditions, its stage of socio-economic development, and development trends. More than 30 years of high-speed economic development have caused China's GDP, population and urban population to expand rapidly. But China's per capita GDP is still quite low, and we can't use European or American per capita indicators such as transportation capacity or road length as a basis for the scale and rate of our development.

Caixin: Profit-driven but unrealistic "leapfrog" development has been widely mentioned in official documents. Are the pursuit of GDP growth and performance stars for government officials driving the transportation campaign?

Lu: Of course. Some local leaders think a big highway investment will play a large role in boosting the local economy. The search for profit and returns on short-term investment is prominent. Wild enthusiasm among local governments for transportation development often forces central government plans to be adapted to local plans. Plans for some local government transportation networks may be redone after new leaders are appointed. In addition, the limitations of current management authority have led to fragmentation among various modes of transport, which relevant government departments have a hard time coordinating....

Caixin: After the Wenzhou train crash, everyone has been concerned about the next step for high-speed rail planning and construction in China. What kind of plan do you think high-speed rail construction should follow?

Lu: Our view is that high-speed railway development in China has only begun. We still lack practical experience in safety and economic efficiency, as well as coordination with civil aviation and expressways, and we need to consolidate existing domestic and international experience. Internationally, the rational operating range for a high-speed railway is considered to be between 180 and 800 kilometers. On either end of this range are the operating ranges of expressways and aviation, respectively.

Caixin: There is a lot of talk about reforming various government departments. How do you see relations between transport authorities and other institutions?

Lu: Transport-related departments are currently too strong. Each has its own, strong planning and design institutions. But authorities in charge of comprehensive coordination are too weak and cannot negate the plans of functioning departments, such as the transportation ministry. There is no overall coordination for transportation construction, and department goals are neither unified nor coordinated. In this atmosphere, enthusiasm is stoked inside various departments, and the result is that each department launches individual, large-scale projects that greatly increase the overall scale and contribute to imbalance in the transport structure....

Behold, the miracle of central planning!  On the bright side, China's vaunted economic plans are at least consistent: now they have creepy ghost highways to connect their creepy ghost cities.  Heh.

But seriously, considering all of these problems, I'm sure that the Chinese government has pulled back on the infrastructure spending in order to implement the necessary reforms that Lu has proposed, right?

Errr:

Fresh funds appear to be flowing into China's beleaguered railway sector more than three months after a deadly train crash, which embarrassed Beijing and prompted it to reassess key aspects of the rapidly built system.

China's state-run Xinhua news agency, quoting unnamed sources, said on Tuesday that the Ministry of Railways expects a 200 billion yuan ($31.45 billion) funding injection soon, though it didn't indicate the source of the support. Calls to the Railway Ministry Tuesday evening weren't answered.

Also Tuesday, bullet-train and locomotive maker CSR Corp. said the ministry late last month made a key 6 billion yuan ($954 million) payment for equipment. Also, in recent weeks, the Railway Ministry itself raised 40 billion yuan selling domestic bonds.

Railway-sector stocks have been buoyed in recent days on hopes that money is being unlocked, in a possible sign that construction halted on thousands of miles of track may resume. Any fresh commitment to railway spending by Beijing is likely to be seen by financial markets as the latest sign authorities are moving to underpin the economy in the face of slowing growth.

Railway work in recent years has been a proud Chinese achievement, and a key aspect of the country's spending on infrastructure construction. But spending slowed this year after the collision in July of two bullet trains that killed 40 people and appeared to undermine the safety of the system. The disaster added to pressures that already included tighter Chinese monetary policy as well as closer scrutiny in the wake of scandals and equipment snafus.

Money has appeared tight at the Ministry of Railways, one of China's largest government institutions. After the July crash, analysts began to question how it might pay its long-term debts: Standard Chartered Bank estimated its debts at the end of the first quarter of 2011 at $300 billion and a debt-to-assets ratio above 58%. By October, railway contractors said work on thousands of miles of track and tunnels had been halted due to cash shortages, a slowdown that in some cases left migrant workers stranded.

Though the July crash prompted authorities to promise a full safety review of the high-speed railway system, Beijing hasn't announced a pullback from its commitment to modernizing the railway, including adding new freight capacity.

Still, there is no sign China's railway troubles are over.

Top railway officials, including the minister, were fired this year by Communist Party investigators on charges of corruption, though little information has been disclosed publicly. Speculation has also swirled that the central government could revamp the agency, possibly by separating its operation responsibilities from oversight roles.

Safety questions continue to hover over high-speed trains following the July accident in the eastern city of Wenzhou. It led to a recall of certain locomotives and a pledge by Beijing that inspections would be undertaken. One sign that clouds still linger: Beijing hasn't yet released a report of a probe into the July 23 crash that was expected in mid-September.

To summarize: government mismanagement of China's supposedly-awesome infrastructure spending has resulted in many wasteful - and often dangerous - bridges, highways and railways.  And despite serious problems surrounding China's vaunted rail program, the government is quietly dumping even more money into the current, broken system in order to maintain arbitrary GDP and employment benchmarks.  But, hey, I'm sure that they've, like, totally fixed all of that, right?

Rrriiiight.

China's infrastructure problems are hardly unique to China: they're typical of any highly-centralized plan to use construction spending as an economic and employment crutch.  And yet President Obama and Mr. Prestowitz (and many others) think we should copy China's master plan?

No thanks.

China's Self-Interest Will Change Its Currency Policy (Shocking, I Know)

Most of the mainstream reporting about China's response to all of this awful market turmoil has focused on the Chinese government's finger-wagging about American fiscal profligacy.  This, of course, is laughable considering China's own, ahem, precarious fiscal situation, but there is some real news to report about the impact of the current US fiscal mess on China - it could actually do what years of worthless political bluster about China's currency in the United States never, ever had a chance of achieving.  This interesting Reuters report (h/t Lee Miller) has the details:

Chinese editorials flaying Washington for fiscal recklessness over its debt dramatics and downgrade mask a growing unease in Beijing: a fear that China's own economic policies are shifting too slowly.

Interviews with a dozen high-ranking Chinese officials and government economists revealed frustration with China's self-imposed fetters to the U.S. dollar and louder calls for a change, but no clear short-term plan to break free.

The obvious answer -- allowing the yuan to rise more rapidly -- carries economic and political costs that China is probably not yet prepared to pay.

One idea that appeared to be gaining some traction in Beijing is to loosen restrictions on Chinese businesses and citizens investing abroad. That would help to reduce the build-up of cash inside China.

But it would only marginally trim China's U.S. exposure. An estimated two-thirds of China's $3.2 trillion in reserves is invested in U.S. dollar-denominated assets such as Treasuries, and the pile of cash grows each month thanks to a heavy trade surplus.

Standard & Poor's stripped the United States of its prized AAA rating on Friday, citing the government's rising debt burden, drawing a blast of criticism from official China media.

Some officials who spoke to Reuters sounded resigned to their fate, acknowledging that there is no viable alternative to investing in U.S. Treasury debt.

But others saw the U.S. debt debacle in recent weeks as just the sort of shove Beijing needs to speed up domestic reforms.

"We need to diversify to the greatest extent possible," said one People's Bank of China official who spoke on condition of anonymity because he was not authorized to speak to the media.

"China's position has always been very clear," he said.

"First, we'll demand strongly that the United States strengthen its self discipline -- they can't just keep issuing debt without limit. Secondly, we need to speed up the pace of our domestic economic transformation and reduce our accumulation of foreign exchange reserves."...

China's ruling Communist Party has long been reluctant to take any steps that might jeopardize the fast economic growth that has helped it stay in power, and generally sees a quick revaluation of the yuan as too risky.

Still, the fact that a well-known former Chinese official is publicly calling for such a sharp policy shift shows that Beijing is ripe for change, whether quicker liberalization of the yuan or a more decisive shift away from exports and toward domestic consumption....

"The downgrade in the U.S. credit rating gives China's government an extremely rare opportunity to reconsider their development strategies," said Zhang Ming, an economist from the Research Center for International Finance, a state think tank.

Those of us on the "sanity" side of the US-China currency debate have long argued that (i) floating the Yuan is strongly in China's own interests; and (ii) internal pressures, not silly political chest-thumping or self-defeating American protectionism, will finally push the Chinese government to amend its currency policies.  It's far from certain that the latest troubling events in US and global markets will finally convince the Chinese to act, but it's unquestionable that this latest Reuters story further supports our two main arguments.