Chinese yuanChina's rapid economic expansion has been marked with a rise in stature on the world stage as well. But so far, the country that displaced Japan as the world's second-largest economy this year has been careful not to throw its weight around.

However, with its economy growing at faster than 10% a year even as much of the developed world struggles, tensions are mounting. And Beijing now seems to be taking a far more assertive tack, a development that could be crucial for markets as approaching congressional elections in the U.S. set the stage for more confrontation around currency revaluations.

"China has worked assiduously to persuade its Asian neighbors that its rise is peaceful and of mutual benefit," analysts at political risk research and consulting firm Eurasia Group wrote in a recent report about the country's aggressive posture. "But in recent months Beijing has picked fights with nearly every major country in Asia."

Newfound Aggressiveness


Flaring maritime disputes with Japan have led to suspicions that China has banned the exports of crucial rare earth metals are the latest chapter. But friction has been on the rise since the spring, when China provided some shelter to North Korea following the sinking of a South Korean naval vessel.

Tensions along its boarder with India are also mounting, and Chinese troops may be present in the Kashmir region according to some reports.

The newfound aggressiveness may offer investors a glimpse into how China's relationship with the U.S. may evolve as well. The dynamic is especially crucial for financial markets: The U.S. is China's largest trading partner, and China purchases vast amounts of U.S. government debt.

The approaching congressional elections are likely to raise the stakes. Some U.S. lawmakers have long accused China of getting an unfair advantage in world trade by keeping its currency artificially depressed through its largely fixed exchange rate pegged to the U.S. dollar. Indeed, President Obama repeatedly pushed China to let the yuan appreciate at a U.N. meeting last week. But China shrugged off the effort and stuck to its position of letting the yuan appreciate gradually.

Everybody's Doing It


As U.S. elections draw near and the nation's joblessness continues to remain elevated, deeply unpopular incumbent politicians are going to find the idea of an outside agitator increasingly appealing. Singling out China as a currency manipulator, though, is getting harder. After all, Japanese authorities are now actively working to devalue the yen for the first time in six years. South Korea has also worked to depress its currency deeply and gain an edge in exports.

The prospects of further quantitative easing by the U.S. Federal Reserve, meanwhile, have pretty much the same impact. The dollar fell sharply against a basket of currencies when Fed chief Ben Bernanke recently opened to door to more intervention if the U.S. economy were to weaken further.

China may understandably be tired of the perpetual finger-pointing even as countries with far higher standards of living work to effectively cheapen their currency. And the newly assertive posture on foreign policy issues may filter through to currency markets as well.

In the spring, the U.S. Treasury Department sidestepped a decision on whether to dub China a currency manipulator. Such a status could lead to trade sanctions and would have major consequences for markets. Back then, China bought itself more time by indicating a gradual rise in yuan's value was in the cards. But by now, China could be thinking it's time that it stopped getting singled out as a currency manipulator.

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monseigneurdev

Apparently they have already experienced a fat, drunken sailor throwing around a lot of cash at a Shanghai bar. They know just what to do now.

October 04 2010 at 11:34 PM Report abuse rate up rate down Reply
sfamilyent

China has shifted their tactics, but it still looks like they want their neighbors and the rest of the world to submit to their will. The foreign policy of the US is not that much different, although we have been allowing our economy to decline while attempting to help developing nations. It would be great if China actually used its newfound wealth to improve the standard of living for its citizens, its neighbors, and the world - but, if they have truly converted to capitalism, then I expect that a small percentage of their population will become very wealthy, most will remain poor, and their government will continue its aggression.

September 28 2010 at 12:45 PM Report abuse rate up rate down Reply
dhggifg

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September 28 2010 at 9:50 AM Report abuse rate up rate down Reply
dhggifg

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September 28 2010 at 9:49 AM Report abuse rate up rate down Reply
dhggifg

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September 28 2010 at 9:49 AM Report abuse rate up rate down Reply
chi3691871

China is becoming a capitialist country. Funny, we worry about them getting all our capital, but the middle class is willing to let political policiesbased on "principle" direct it to Americans that are helping them get it. Think about it. The enemy of capitialism is greed, someone ends up with all the capital, and all the politicians. Of course, policies that redistribute wealth, through taxation, seems to be a negative. Think it through.

September 28 2010 at 1:08 AM Report abuse +1 rate up rate down Reply
1 reply to chi3691871's comment
scottee

we need a fairtax.org. look it up online and educate yourself. this will take the money and power away from washington and give it back to we, the people. unless, of course, you want government to do everything for you and send you the bill.

September 28 2010 at 9:44 AM Report abuse rate up rate down Reply
jtfct

I know you all are mad as hell. It's understandable. Calm down. Take a couple of Viagra. You all be find in the morning. The sky is not falling. The sun will rise and shine tomorrow. Peace.

September 27 2010 at 8:40 PM Report abuse rate up rate down Reply
linmarco

People talk about voting in conservatives to solve our problems but it's just that. Talk! Example: Three conservatives running. They are from the Constitution party, Libertarian Party, and the Republican party. Now which of these do you think will get elected? If you say Republican go to the head of the class. They want change but they want it to come from either of the two major existing parties. Excuse me but these are the culprits that helped get us in this mess. By the way it didn't start with this president. Go back a few decades.

September 27 2010 at 7:52 PM Report abuse -1 rate up rate down Reply
1 reply to linmarco's comment
scottee

we need the TEA (taxed enough already) party whose core values are fiscal responsibility, constitutionally limited government and free markets...

September 28 2010 at 9:42 AM Report abuse rate up rate down Reply
scottee

what's pushing China to become more assertive????? how about the U.S. national debt????? that's what causing us taxpayers to be more assertive...the total fiscally irresponsibility of our representatives in Congress!

September 27 2010 at 7:35 PM Report abuse +2 rate up rate down Reply
nconstinc

Screw China! If corporate America pulled out and paid a decent wage here, we wouldnt need China! They OWN us thanks to corporate greed! I hope every coporate CEO COO Board member get what they deserve in the end! Nothing but darkness in hell burning!

September 27 2010 at 5:38 PM Report abuse +1 rate up rate down Reply
1 reply to nconstinc's comment
ibew1127

its time to vote the bums out

September 28 2010 at 3:54 PM Report abuse rate up rate down Reply