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. (2003-09-09 Asia Times)
