Life As It Goes By

As China moves to a more market oriented currency policy, questions for the rationale behind this move remain unanswered. True enough, the main topic of the debate is unfair valuation of the currency, which is now currently used by almost every country around the world (actually only those who have trading with the Chinese, but who hasn’t). A slanted view would be to the benefits of trading businesses in US and Europe. But how so?

Apparently, number crunchers for trade figures feel that reducing the deficit is the top priority in improving the overall economy (though raising the prices of the imports will, in fact, increase the deficit). Making imports more expensive will turn the ‘free’ market to alternatives or substitutes such as cheaper if not, more convenient or better valued local products. In the world today, where everything we buy has some parts manufactured in China, there should be more than 1 reasons why they are made there. At the same time, more expensive yuan doesn’t automatically translate to more expensive exports from China. It would be a big mistake to think the Chinese as big fat, lazy workers (and more productive maybe) as in the West. With 37% of its people (about 481 million;greater US’s 309 million population) earning less than $2 a day, it won’t be too difficult for Chinese bosses to find cheaper employees to tide over. Having said so, it is still worth a try for the West to find out the effects of better valued yuan. It feels better to be in the shit together.

What is in for the Chinese to perform such an act? And as a big nation, the central government will not be easily let off for such a grave mistake made. Not only will they lose their competitive advantage, the US treasury bills on their hands will worth less as well. There were calls to reduce the value of the US currency but they were all ignored. China could have done the same. There are now accusations that the wrongly valued yuan has a part to play in the financial meltdown in US and subsequently in Europe and around the world. These even encourage bankers to stand out openly to claim it is not their faults.

Perhaps the steel trade means a lot for the Chinese. This is not the first time duties has been imposed on Chinese steel. From my understanding, such duties are meant to help US industry and punish China for their dumping activities. China has been singled out (as previously on the rubber tyres). I was alarmed to learn that (having known only Arcelor Mittal) there are already 4 Chinese steel producers in the top 10 list (no wonder, the special treatment). So much for the anti-protectionism…

China must have taken the hits quite badly. By agreeing to the terms, it hope to receive more favourable treatment. If this is the case, then China will have to prepare for more “sanctions” (since it sets as a perfect example on how to pressurize China). This is also a move that breaks away from its normal self: unwavering and uncompromising.

A more market oriented currency would imply a step nearer to the status of a world currency. To be as exchangeable as the US currency, this is definitely a big step to take. At the same time, it also expresses the high level of confidence shown by the Chinese government on its currency, economy and future. There are also concerns about the risks that a more global currency would bring. Many have failed before (such as Russia, Argentina and Thailand). Even the mighty pounds can fall into the hands of the speculators. By opening its door to attack, China will show the world that it is more than just a manufacturing base.

Unlike Google, China seems to listen more to its big customers now. In return, it may expect something greater. A shift up in the service level will justify for the higher price paid for. All this while, the manufacturing giant has accommodated all kinds of unreasonable demands to produce at a cost not even half of the local produce (I guess this applies to almost everywhere). However, the giant does know a tip or two. It can’t stay low forever. To compete with the best, it has to raise its standards. For those who can’t compete at this level, they would simply continue to make low end products by cutting further into their costs. For those who make it, it will have a vital stabilizing effect on the economy. In other words, China can’t be the world’s 2nd largest economy for nothing. It has to show it has quality as well. By selling its products at almost the same price, Chinese hope to match the required standards if not more.

The pursuit for perfection is the key. Productivity levels in China are not really that high (I don’t think they work as hard as the Japanese, Korean and Americans). The reason why Japan is ahead of China for so many years despite having a smaller population is partly due to its workers’ productivity. Now that China has raised its level to maybe half of what is possible, but at a much larger scale, things look totally different. Technologically, China is at a distance away from Japan, Europe and US. But it has much room of improvement and it has an easier task in achieving that, unlike its rivals.

If the transition to a more flexible currency is managed well, the benefits to be reaped can be great. Besides, the fact that yuan is under valued brings out more why this is the direction that China should head.

A few days ago, Japan Finance minister reassured the position of the US dollar in the world by giving it Japan’s endorsement. It openly states that Japanese yen is not a candidate for the USD replacement. Remaining contenders are Euros, Yuan (unlikely too, as the Chinese has proposed a “basket” approach, rather than a single currency approach) and Special Drawing Rights, SDR from the IMF.

Question is  which one of the above carries the weight that the US dollar holds. It is true that the US currency has devalued though current trading value doesn’t truly represent that (those betting against or for dollar must be having lots of fun now). Having defeated the gold and slowly changing from paper to plastics or electrons, the US dollar has a presence which no other contender do have. As I learn from my ex-boss, history always play a part on the current development. All the constraints we see now could be the effects of the past. The US currency has deep roots.

To replace it, its rivals shall have to begin from the roots. The reason why you can use US dollar in  places where there is no access to the local currency, is because the huge foreign reserves of the US currency worldwide. The person who takes the USD from you can easily find someone else to exchange something for him. In a sense, it’s like gold.

Not only that, many things are priced in USD. One notable example is oil. It is almost impossible to value the current price of oil. If it is to correctly represent its worth, the price of oil will be too expensive for everyone and immediately, another round of world inflation will occur.

It is not possible to replace US dollars in one day. One has to prepare enough pulp or bakelite for the world consumption. Maybe the EU has such capabilities. However, they are not really united on this front. Till today, it still amazes me to see the existence of European Union. Who would have imagined that the colonial powers have gathered and cooperated, after seeing the centuries of wars among them. Have they lost their desire to dominate the world? It’s really hard to say. One thing is for sure though. Too many minds together can be as constructive, and as destructive as they can be.  Adding to that, are the diverse cultural background and historical contraints.

What about Yuan? China has been the topic of the new millennium. It is like it has been away for the past millennium. Its growth is envied by all though typical for all developing countries. The uniqueness about China is its ability to produce, not just for its own billion of consumers but also for the other billions in the rest of the world. Its value proposition is undeniably the best around the world at the moment. However, despite its actual age, China is still relatively young as an economical power. There are still many stages for it to reach before it fulfills its potential and matures. By this, I mean, when the China economy sneezes a bit and the whole world’s economy shakes. Then, the yuan and China are ready.

Having set such a difficult condition, it appears that there is no contenders that can really qualify and we are back to the same spot. We may need more than just a major change. A change that may take decades. Is it worth it? But if we were to keep status quo, we are devaluing our own money in relation to the current world currency of US. If we set appropriate values for our monies, we will face widespread inflation. It seems out of the 2 options, the first is a safer approach. Just like the choice taken by the Japanese minister… The Americans have promised that there won’t be a repeat of the financial system failure we just witnessed. I am thinking how long will this be? End of President Obama’s term? A decade? 2 or 3? The next generation will forget about this naturally and the effects for this time around is not as catastrophic (so who will remember this hard).