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SPEAKING
FREELY
The admiral and the
yuan
By Pietro Ventani
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
Six hundred years
ago, at exactly this time of year, an
extraordinary event was taking place in the South
China Sea. A massive fleet of baochuan
(treasure ships), under the command of the Chinese
Admiral Zheng He, was sailing off the shores of
the Middle Kingdom. His mission was to project
into the outside world the power, the technology
and the culture of the Chinese empire, born anew
after almost a century of Mongol domination. Zheng
He was simultaneously an imperial envoy, military
commander and chief trade negotiator, and his
baochuan were some of the largest vessels
ever built - hundreds of ships packed with all
sorts of goods to be traded in exchange for the
very best the world had to offer.
For the
following three decades and over eight different
expeditions, Zheng He established trading ports,
subjugated enemies and established alliances along
the coasts of southeast Asia, India and Africa. He
greatly extended China's influence by offering
protection, stability and trade to far off
populations. The network of alliances, cities and
trading routes he created were to outlast him, and
to have far reaching influence for centuries to
come. Zheng He's expedition was perhaps the
largest foreign mission ever undertaken, an act of
supreme self-confidence by the newly established
Ming Dynasty. It was a mission anchored in the
belief that China was meant to play a central role
among the most powerful nations of the world.
On Thursday, July 21 of this year, another
remarkable event took place, this time in modern
Beijing. The People's Bank of China (PBoC)
announced the removal of the peg of the Chinese
yuan to the US dollar after months of speculation.
Under the new system, the exchange rate is based
on a basket of currencies, whose composition and
weight has yet to be disclosed. The model is a
"managed float", similar to the system adopted for
the Singapore dollar. At the same time that the
peg was removed, the PBoC revalued the yuan 2%
upward against the dollar. Some commentators have
cried foul, as the move fell short of full
currency convertibility, the hallmark of any
self-respecting world power. Nonetheless, most
agreed that the step represented important
progress toward the goal of the yuan joining the
group of currencies that can be freely traded on
international markets. Six hundred years after the
departure of Zheng He's ships from Nanjing's
harbor, China is again taking a major step to open
itself to the outside world and claiming the role
of superpower - this time, by letting its currency
sail off into the treacherous seas of
international financial markets.
Historians agree that Zheng He's
expeditions were a diplomatic and economic success
as they allowed China to assert herself as the
premier mercantile and military power in Asia.
Historians also agree that the Admiral himself
deserves much of the credit for the voyages. A
Muslim by birth, Zheng He was adopted very young
as a eunuch by a prince who would later become Zhu
Di, the third Ming emperor. Zheng He quickly
became one of the most trusted high officials at
the imperial court and was selected to lead the
efforts of Chinese diplomacy overseas. In the best
Confucian tradition, Zheng was not only an expert
military strategist and skilled leader but also an
enlightened scholar, versed in several languages.
While not reluctant to use military power, he also
believed in the opportunities that peaceful
coexistence and global trade could bring to all
nations regardless of race or religion.
In
spite of Zheng's successes, as Zhu Di aged, more
conservative forces started to prevail in Beijing.
The empire was effectively run by the imperial
bureaucracy, or mandarins, and this group had
never been comfortable with the constant flow of
new people and ideas coming into China along with
foreign envoys and merchants. In the Confucian
view, a society can only thrive under order and
stability, while change and diversity are a source
of chaos. Zheng He died in 1433, probably while at
sea. By that time, the ongoing threats from the
Mongols, who were pressuring China's northern
borders, and frequent episodes of Japanese piracy
provided a convenient justification to shut down
the expensive foreign missions. The belief that
China had nothing to gain from dealing with the
outside world prevailed over the opportunity for
change and renewal.
A few years later, the
new Ming emperor would not only put a stop to all
maritime expeditions, but also take draconian
measures to ensure that China remained insulated
from the outside world. Zheng He's amazing fleets
and the records of his trips were destroyed, and
new laws were passed restricting any seafaring
activity. One such law deemed the construction of
a vessel with more than two masts a capital
offense. Zheng He, the greatest admiral in China's
history, was soon forgotten, and people started to
think of his voyages as "legends". This turn of
events had a far-reaching influence over
subsequent Chinese history. In 1644 a decrepit
Ming dynasty would fall prey, again, to a
"barbarian" tribe: the Manchu, who established
themselves as the "Qing" dynasty. The new rulers
were no less isolationist than their predecessors,
and failed to modernize the country. From 1839,
when the First Opium War broke out, China became
prey of Western powers that humiliated and
controlled her for decades to come.
The
revaluation of the yuan took place after years of
intense pressure from the US, EU, and Japan, who
complained that the yuan was purposely undervalued
in order to make Chinese goods more competitive in
the world market. But these arguments belong more
to the realm of domestic political convenience
than to economic logic, and there have been a
large number of commentaries refuting such claims.
There were compelling reasons for the Chinese
authorities to maintain the peg and, after the
removal, for showing caution in the new system
just introduced.
These reasons have to do
with the weakness of China's banking system and
the need to protect the value of its foreign
exchange reserves. The banking system is widely
recognized as the weakest link in the Chinese
economy and a potential trigger for instability.
For decades banks have provided credit on the
basis of political convenience and expediency
rather than sound economic rationale. This
mismanagement has created a very high level of
non-performing loans and a variety of systemic
inefficiencies. Nonetheless, in the last few
years, the government has made an effort to
restructure the banking sector and is continuing
to do so. The introduction of the new exchange
regime is an evidence of growing trust in the
banking system.
Another reason for the
reluctance to leave the yuan at the mercy of
international currency markets has been, and still
is, the need to protect the value of China's
foreign currency reserves. These are currently
estimated at a massive US$711 billion, with
economists estimating at least three quarters of
such reserves to be in US dollars. As the new
exchange is fixed against a basket of currencies,
the managed float will probably imply a further
gradual diversification of such reserves into
other currencies. Such diversification, however,
is likely to proceed slowly and outside of public
view, to avoid a negative impact on the value of
US currency. The value of the foreign reserves is
crucial for a number of reasons: first of all, as
a tool to deflate possible speculative actions
against the yuan, second, as a reserve in case of
major failures of the banking system, and third,
as a means to finance the acquisition of foreign
companies. The importance of the latter is likely
to grow over time as the Chinese government steps
up its efforts to acquire companies overseas. The
acquisition of foreign assets is seen in Beijing
as a key way to facilitate the transformation of
local firms into global players and to secure
access to strategic commodities.
The
speculation over the next moves of the PBoC after
the removal of the peg has been intense in the
last few weeks. Some critics have already griped
that China has done too little to address its
alleged unfair trade practices. Yet it would be a
mistake not to view the recent steps in a positive
light. Confucius said, "A journey of a thousand
miles begins with a single step". The removal of
the peg should be seen as a small step in China's
journey to reassert her historical role as one of
the world's major powers, and to become a fully
integrated member of the international community.
Once again, after 600 years, China is overcoming
the fear of change ingrained in its culture and
opening up - perhaps embracing Zheng He's belief
that expansion is in the best long-term interest
of China, and that the Middle Kingdom can play a
role of global leadership. If the Ming emperors
had continued on the path set by the admiral
rather than turning inward, the world would be
very different today. If today's China resists her
insular tendencies and continues on the road to
openness and global integration, tomorrow's world
will be different and Zheng He's vision, perhaps,
fulfilled.
Pietro Ventani is the
managing director of NPV Partners, a Hong
Kong-based management consulting firm. He is
co-authoring a book on innovation in China.
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing. |
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