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Beijing's currency
conundrum
By Francesco Sisci
BEIJING - Despite world headlines indicating
heavy pressure, US Treasury Secretary John T Snow in his
visit to Beijing last week actually pressed the
yuan-revaluation issue quite softly. He returned to the
United States with a promise of a future liberalization
of exchange rates and with a cut of tax rebates on
exports, which whittles down Chinese commodity
competitiveness by some 5 percent.
Chinese
companies will be allowed to hold more cash, and thus
surrender less of it to the central bank, and Chinese
tourists will be able to take, and spend, more money
abroad, removing some steam from the present revaluation
pressures. Most important, the Chinese will buy more US
Treasury bonds.
This is a high prize. Next to
Japan, China is the United States' largest purchaser of
bonds, but in the past couple of years China had been
dreaming of a strong euro and strong ties with Europe
and thus had been buying more euros. However, this could
be a good time to sell into the euro's strength, which
is diminishing, at least temporarily. The Chinese
purchase of US bonds can guarantee that interest rates
are low and China's continuing economic expansion will
be financed. The cheap yuan also guarantees that Chinese
imports won't become expensive and thus trigger perhaps
a new round of inflation in the United States.
On the other hand, many US economists are clear
that the US jobs lost to China won't be recovered with
yuan revaluation: they are lost forever. If they go
anywhere, these jobs will go to India, or Mexico, or
Myanmar, if and when the yuan makes these exports
uncompetitive. In the present situation, despite the
official populist rhetoric, the United States has no
real interest in a short-term revaluation of the yuan
per se that could create more problems than it solves.
There is long-term interest in the free exchange of the
yuan, but this is a different and more complicated
kettle of fish. In any case, once the exchange is free,
it is not certain that the yuan will be revalued upward.
It is true that in the past decade China had
higher growth, lower inflation, larger trade surpluses
and more labor productivity increases than the United
States. Prima facie these are all arguments leading to
upward yuan revaluation, but would that really occur?
Possibly not. The opposite is actually more likely.
Once the yuan were freely convertible, foreign
companies could invest in the Chinese stock market,
which would be dangerous. Many of the worst companies
are listed and most of the best are not. In a nutshell
this is the problem with the Chinese stock exchanges,
making them a honey pot for world speculators. They
could plunge in, arguing that China's fundamentals are
good, create a bubble, reap fat profits, and then run
away saying the Chinese companies did not perform.
And it would all be true: the strength of
China's economy is not paralleled by the performance of
listed companies. However, coming in and running out
could be the equivalent of beating China's fragile
economic institutions with a sledgehammer. That could
kindle an economic, then a social and political crisis.
It could be the end of the Chinese dream and the
beginning of the Chinese nightmare. Do we really want to
see this movie?
Even short of that, the response
of Chinese retail investors to a free currency exchange
could be hard to predict. Whoever has money in China is
always subject to possible retaliation by the state,
which can claim they are tax evaders who made their
money through corruption, seize property, fine them or
even lock them up. In recent decades the only guarantee
against such a future has been taking money abroad and
bringing it back as foreign investment.
As
little as 20 and as much as 70 percent of the foreign
direct investment in China is probably laundered Chinese
cash. To stop this phenomenon, China should provide more
guarantees to Chinese entrepreneurs and absolve all past
mistakes. But this can't be done for domestic reasons:
many in the Communist Party would rebel against it,
saying that it would acquit all the past corruption.
Besides, ideologically it would be hard to
explain why for the same acts some were put in prison or
even executed, others will be anointed as the new
wealthy Chinese aristocracy. Moreover, many big
speculators still want to gain some more, and hope the
system will carry on being as murky as ever, to make
even larger profits.
An amnesty for past
economic crimes would clear the slate, gear the state
better against new economic crimes and prevent future
economic ones. But some big potatoes still want to make
money out of state control. And, while only the ones
with big connections can manage to take their money
abroad, if the exchange rate were freed, every salary
man could end up with a bank account in the Bahamas.
This capital flight would drop the yuan exchange rate,
not increase it.
Therefore there are plenty of
reasons to view yuan revaluation with great caution away
from the fads inflaming the popular press and the
demagogues in the West. The US government is doing it,
but the international press is moving in the opposite
direction, which betrays a different and possibly a
larger problem: China's difficulty in communicating with
the rest of the world. Here the government counts only
as long as it has popular support. For many reasons
China is now better at improving
government-to-government relations, as the recent Korea
talks proved, but is much less apt at talking to the
common people of the world who day after day are growing
more concerned and attentive about China's moves.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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