May 29 (Bloomberg) -- Call it Henry Paulson's Chinese wall.

The U.S. Treasury secretary, in his drive to get China to strengthen the yuan, has hit a barrier almost as great as the 4,000-mile one outside Beijing. Never mind excitement yesterday that the yuan was at the strongest since a dollar link was scrapped in July 2005. China will continue to move gradually.

One suggestion for Paulson: Try a different argument. The current one is looking increasingly weak on the economics.

To his meetings with Vice Premier Wu Yi in Washington last week, Paulson brought the now familiar charge that China is unfairly holding down its currency and costing the U.S. jobs. Wu brought something far more potent: an argument poking holes in the contention that U.S. imbalances are China's fault.

Roughly 85 percent of China's trade surplus is generated by foreign companies exporting products from China that are no longer made in the U.S., such as shoes. Wu mentioned that inconvenient fact when she said ``we should not easily blame the other side for our own domestic problems.''

There was little carping when Corporate America spent much of the 1990s building factories in China. Now that the U.S. is feeling the heat from an ascendant Asian economy, Capitol Hill is all of a sudden irritated about companies using China to boost profits?

Sure, Asia's No. 2 economy needs to go further to liberalize its financial sector and clamp down on piracy. Yet lawmakers demanding that China act to reverse a record $232.5 billion U.S. trade deficit should be careful what they wish for.

New Approach

For one thing, a rising yuan could slam an economy on which the world is relying and slow Beijing's purchases of U.S. Treasuries, boosting U.S. interest rates.

For another, China's $3 billion investment in Blackstone Group is a harbinger of things to come. If U.S. lawmakers threatening trade sanctions think the political heat is rising now, just wait until China starts buying up household-name U.S. companies. A stronger yuan makes U.S. corporate jewels cheaper.

Even so, U.S. lawmakers seem set on bullying China into boosting the yuan. As the effort unfolds, one thing is becoming clear: Paulson needs a new approach if he wants a breakthrough.

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John Howard may be getting a phone call from George W. Bush. The subject: Australia's ideas on who should replace Paul Wolfowitz as World Bank president.

The government of Australian Prime Minister Howard isn't known for public disagreements with U.S. President Bush. From sending troops to Iraq to blowing off the Kyoto Protocol, Howard is one of Bush's staunchest allies anywhere.

Open Process

That makes it all the more intriguing that Howard's treasurer, Peter Costello, would say the World Bank presidency should be open to citizens of any nation and based on merit. On Monday, Costello said the selection of the aid agency's leader should be an ``open, transparent process.''

It could just be that Costello wants the job. Yet Australia joins Brazil's Finance Minister Guido Mantega and South African Finance Minister Trevor Manuel in calling for change in the selection of the World Bank's president, who has always been a U.S. citizen nominated by the White House. Sadly, the process has been anything but transparent or open.

Of course, if the next World Bank head were to personify the direction of the global economy, he or she would be Asian. More than two-thirds of the world's poor live in Asia and no region can compare with its economic potential.

Australia's Call

Those calling for the World Bank to be dismantled also forget that such an institution has rarely been more important. China, India and other developing Asian economies comprise the new frontier of capitalism.

Yet rapid growth masks an array of risks like weak infrastructure, high poverty, inadequate education and nascent HIV/AIDS epidemics. Investors should keep in mind that if poverty holds back some Asian economies, the biggest and wealthiest ones will be undermined, too.

If the best candidate is British or Japanese or Indian or Brazilian or Australian, he or she should get the World Bank job. Let's hope Australia will be more successful than others in getting that point across in Washington.

* * *

Japan Airlines Corp. lost more altitude over the weekend after Standard & Poor's placed its long-term corporate ratings on credit watch with negative implications.

One wonders what took S&P so long.

The catalyst was a report that Asia's most indebted airline asked its banks to convert some debt into equity. Japan Airlines is seeking as much as 400 billion yen ($3.29 billion) of financial aid from its banks, the Nikkei newspaper reported on May 24. Under credit ratings criteria, a debt-for-equity swap is equivalent to a default on debt obligations.

Yet Japan Airlines has been in turbulence for some time. The struggling carrier is an intriguing microcosm of what ails Japan's economy even as it shakes off 15 years of minimal growth.

Japan Airlines is a bloated, uncompetitive, expensive, shareholder-unfriendly company -- not unlike Japan's entire economy in some ways.

Yes, Japan is back and Prime Minister Junichiro Koizumi made progress in shaking up Japan Inc. before stepping down last September. The economy will reap the dividends for years to come.

JAL and Japan

Yet to raise its game, Japan still needs to reduce public debt, increase competition, boost productivity, encourage entrepreneurship, attract more foreign capital, end its addiction to ultra-low interest rates and improve corporate governance.

Many of these challenges apply to Japan Airlines, too. Tackling them will help Japan and its companies fly higher.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Lima, or through the Tokyo newsroom at wpesek@bloomberg.net.

Last Updated: May 28, 2007 18:46 EDT