BEIJING - Maybe it's because its population is so large (over 1.3 billion). Maybe it's because its civilization is so ancient and different or maybe it's because its economy went through extraordinary growth - (about 9 percent a year for the past 25 years) but it is very easy to paint China as a monster. The Chinese dragon is starting to spit flames and devour jobs, market share, revenues and profits.

This year's figures add fear to the awe. In figures released on August 13, China's retail sales surged 9.8 percent year-on-year to 356.2 billion yuan (US$43 billion) in July. July growth of retail sales, according to the figures, was 1.5 percentage points higher than in June. SARS,severe acute respiratory syndrome, did not succeed in stopping the Chinese engine, although officials believe it could have cost as many as 1.2 million jobs in a country where leftover redundancy from the closure of state-owned enterprises is a volatile political factor.

In the second quarter of the year, when domestic passengers were quarantined in second-rate hotels and foreigners deserted trade fairs in Shanghai and Guangzhou, China's gross domestic product nonetheless grew 6.7 percent.

Though GDP growth slowed from 9.9 percent in the first quarter, it still grew 8.2 percent in the first half of the year - for a total of US$605 billion. And, thanks to a strong summer recovery, it is likely to meet expectations of 7 percent growth for the year. Even if we are to cut down these figures by a couple of points the result is still huge.

If SARS doesn't resurface at the summer's end, China will see record growth in 2003. Foreign entrepreneurs living in China have been struck by the Chinese ability to react and are now trying to move production here. Those living abroad, who have been asking that the local currency be revalued, are the most frightened. They think that more investments in China, more Chinese exports mean less jobs at home.

However it is perhaps wrong to think of China in algebraic terms: one more job in China equals one less in the West. In a global market, companies have to remain competitive at a global level while trying to enter the Chinese market, the world's biggest. If they keep producing at home where costs are high, they will lose global market share and won't break into the Chinese market.

In other words, if companies keep their production in Europe, they won't save any European jobs. They will end up losing all of them. But if they decentralize and send part of their production to China and keep their technological and design skills in Italy, they will broaden their market shares and save qualified jobs, though not necessarily in the same sectors.

There are no easy solutions. International bankers are asking the Chinese government to revalue the yuan by between 20 percent or even 40 percent, which would bring China's GDP close to that of Germany's.

A short-term revaluation of the yuan would reduce exports, but it would also spur the growth of the domestic market and make it even more difficult to penetrate. The size and potential of the Chinese market is such that it would become central to the world economy. In other words, foreign companies would find it profitable to sell their products to the Chinese market, a move that would foster the growth of the domestic market, which in turn, could send Chinese GDP skyrocketing.

But if currently low-cost Chinese goods were to rise in price in the US as a result of revaluation, that could spur an inflationary effect, which would further hurt a weak global economy. As Hugo Restall wrote in the Asian Wall Street Journal three weeks ago, the only winners would be those companies that are now already established in China and that would reinforce the shared interests of the two rims of the Pacific.

Development of the domestic market in China could spur the global economy and hugely expand the Chinese one. When Japan revalued its currency in the 1980s, Japanese investments abroad increased but consumption in the domestic market - which was already saturated - stalled. On the contrary, the revaluation of the yuan would have a double effect. It would help Chinese expansion abroad, it would be cheaper for the Chinese to buy assets abroad and transfer to Europe or America investment to conquer those markets, while increasing domestic consumption, the multinationals now selling Chinese-made goods to the US would find convenient to sell these goods in China.

This in turn would increase inflation pressure in the US for instance, where cheap Chinese imports have so far kept prices under control, and it would create added value in China, where Chinese would buy better goods for less money. As Henry Liu has argued in Asia Times Online, this could boost China's growth and, coupled with foreign expansion of Chinese industries, would multiply fears of a China threat worldwide. Meanwhile, a higher exchange rate would also increase barriers to penetration of foreign capital: getting into the Chinese market would become more expensive.

All in all for China it could offer many points of interest. But there could be also many disadvantages. A stronger yuan would increase the problem of nonperforming loans in the banking system, as it would open the financial markets and further expose the weak Chinese bank to foreign competition; it could make the domestic financial market even more dysfunctional, and it would not solve the problems of internal distribution, which still need to be addressed to help the market growth. Finally, the renminbi revaluation could complicate matters in shedding light on the legal problems concerning the protection of the Chinese private property as Chinese private investors could face more problems with the banks and with the state with their revalued assets.

With all this there advantages and disadvantages for China in the revaluation of the yuan provided that in the past 10 years China has had a higher GDP growth and lower inflation rate than the US or Europe, and thus there is room to argue for a revaluation of the Chinese currency. And this might well occur. But at the end of the day what is most important for the global economy is stability, and strangely as it may look, a pegged yuan might work for that better than a highly revalued one. (2003-08-19 Asia Times)