The coming Beijing Summer Olympic Games promise to be the most political event since the first time non-Greeks participated in the ancient form of the sports enclave. This is no exaggeration, as the Games will mark the first big step by China in the international arena as a power in its own right, while also providing many Westerners with their first glimpse of the ancient civilization.

Looking at the tone of the Western media towards the Games though, it is clear that cudgels are being taken up and tools are being sharpened for a propaganda battle aimed at denting the political and cultural mileage that would rightfully accrue to China from such a spectacle.

Tibet is the latest cause celebre, if it hadn’t come along perhaps with the active encouragement of the US Central Intelligence Agency – to the acute embarrassment of India, which houses the exiled Dalai Lama in good faith – then global media would have been more than happy to pick up another cause, ranging from Taiwan to any ragtag Falungong practitioner that could be found wandering the streets of California. Perhaps even Hollywood moguls like Steven Spielberg would have been given their anti-China scripts to write and produce, much in the fashion of Dogs of War.

The constant stream of attacks on China in the Western media has confused many Asians, and this is understandable, given that the roots of the current propaganda battle have more to do with geo-economics than mere geopolitics. For people like me who consider the one a continuation of the other, the distinction is lost anyway. The key question here is to understand why the Group of Seven (G7) of leading economic powers is acting against China, and what are the consequences for the rest of the region.

Understanding G7 fears

Regular readers of this column will know that I consider the G7 somewhat contemptuously, as my past article on the subject (Dear dinosaurs, Asia Times Online, October 20, 2007) makes amply clear. The annual conclave – finance officials of member countries huddle in Washington this week – is nothing but an excuse for a bunch of tomorrow’s redundant powers to confab and gather enough memorabilia with which to entertain themselves in their dotage.

The background to this bout of anxiety regarding China in the Western world’s media, not least in its financial media, is of course the existential crisis that confronts the major economic powers of today – the US, which is staring at the demise of its currency as the global reserve denomination (Dead-dollar sketch, Asia Times Online, March 4, 2008) and the various pockets of Europe that need to come to terms with their own mortality more urgently than any other group of people (see Euro-trash, Asia Times Online, March 11, 2008).

While these two articles were perhaps too brief to examine the full range of issues confronting these economic zones in question, the main points about a dysfunctional financial system that needs constant care and capital from the collective savings kitty was pointed to. In turn, lacking the demographic strength required to engineer enough financing for these activities, both the US and Europe now feel an acute need to continue gathering capital from the rest of the world and in particular, the great savers of Asia.

China is hardly the sole target of the G7 nostalgia brigade. In my previous article (A conspiracy against gold, Asia Times Online, April 3, 2008), I laid out the steps being taken by global central banks against the potential for gold to replace fiat currencies at the center of the global financial system. Being only able to buy or sell the precious metals at prices set by markets, central banks have no power to actually manipulate the underlying value of gold.

Alternatives to the dollar

Thus, if they choose to sell the commodity and drive its price down, it is highly likely that bouts of inflation currently being seen in the global economic system will eventually force every right-thinking investor to consider alternatives to the US dollar and the euro. This is perhaps the biggest fear confronting central bankers across G7, thereby necessitating unprecedented steps aimed at restoring the credibility of various fiat currencies by first inflating asset values such as stock prices.

The biggest losers in this policy debate are of course Asian countries, whose collective savings are falling in value with every move in the US dollar and its fiat currency cohorts, thanks to the mountains of savings that are held in those currencies. Asian central bankers being a bunch of decidedly unimaginative folks, in effect work for the US Federal Reserve and the European Central Bank (ECB). But even they are not stupid enough to imagine that Asian savers will be fooled forever, therefore the idea is to buy as much time as possible.

This state of an unsettled equilibrium can go on long enough for the US Fed and the ECB to demolish purchasing power and effect a bankruptcy of Asian savings though stealth.

What can Asian countries do?

I have long argued that Asians buying US dollar and euro-denominated assets for their reserves is the same idea as imperialism, wherein workers accept IOUs on the companies they work for, in place of hard cash. With a bulk of their future purchasing power tied in enterprises that must succeed for them to get paid, workers over time forsake good working conditions and other necessities to ensure that the indentures are paid.

In other words, Asia provides the debt financing required for the global equity markets to function, which in turn account for a substantial portion of the savings of many rich countries including the US and Britain. Pull the debt financing away and all equity values converge to zero – but equity investors are clearly betting that Asians will never get the smarts to do that.

Given this continued demolition of their purchasing power and eventual penury for many Asian countries, despite their high savings of today, it becomes important for the region to rally around China. This can be done in many ways, but a few baby steps will go a long way in reminding G7 where the world’s true economic power lies today.

1. Firstly, every one of Asia’s top leaders must pledge to attend the opening ceremony of the Beijing Olympics, and must do so in public immediately. This will serve adequately as snubs to various European leaders (such as French President Nicolas Sarkozy) who have threatened to boycott the ceremony.
2. Secondly, the region’s central banks should collaborate to dump billions of US Treasuries, federal agency securities, European government bonds and mortgage-related securities over the next few weeks. This will push yields up sharply across G7 and serve notice of a buyer’s strike.
3. Thirdly, Asian countries must demand that G7 countries honor their own empty rhetoric with respect to free markets by allowing untrammeled access to Asian companies intending to buy G7 banks and corporates. No more talk of evil sovereign wealth funds, thank you – you owe us money, so we will take whatever steps required getting it back.
4. Lastly, the region’s currencies should adopt a soft peg to the Chinese yuan, allowing the pace of appreciation against the US dollar for the whole region to be dictated by the country with the largest potential losses in such a situation, namely China.

How China can help?

To be sure, there are many prickly issues between China and its Asian neighbors that the former can help to iron out over the short term, in turn pushing key democracies such as Japan, South Korea and India into its own orbit and away from the US influence that so pervades the region. A few helpful steps would include:

1. Renounce violence against Taiwan. Realistically, no Asian country will allow Taiwan to become independent, and without that there is no chance of any such eventuality. Therefore, China need not bother about the military option that it would never have to use.
2. Dropping the strident rhetoric against personalities such as the Dalai Lama, as Mao Zedong-era language is an embarrassment for today’s China and only emboldens its opponents.
3. Withdraw support from embarrassing tin-pot dictatorships such as North Korea, Myanmar and Sudan.
4. Provide leadership on matters shown above, engaging its Asian neighbors as fellow industrialists rather than competitors. This includes leading the region on adjusting currency values as well as providing cooperation on other economic matters.

In February, the G7 urged China to accelerate appreciation of its effective exchange rate, while the major economies also want it to further open up trade, cut investment barriers and increase disclosure on sovereign wealth funds. The US may also like China to buy a lot more Fannie Mae/Freddie Mac (US agencies) securities that would in turn support the housing sector.

The most recent G7 meeting in October was a comedy, but this time the rhetoric isn’t going to be funny for Asia as leaders gather to push for more aggressive action that would save their economies while bankrupting Asian purchasing power. This cannot be allowed to happen. Therefore, Asian leaders must see through the current smokescreens around China to understand that they are themselves the primary targets of all such actions. It is time to flex some Asian muscle.