Life As It Goes By

These two (dragon and eagle) creatures could be the icons for the decades to come. Maybe clash of titans would be a more appropriate title. As the world quietens down after financial woes in the past 2 years, the world’s greatest economy, US, and the newly installed number 2, China, are tugged in a series of trade wars (primarily anti-dumping duties). The conspiracy behind is said to be currency-driven. US hopes that the Chinese yuan to hold a higher value and hence, shifting the balance of the overall trade more to the US side. There remain questions that need to be answered. What should be the satisfied value for the yuan? As China progresses slowly towards this forced move, US accelerates the process by letting the dollar to fall not just against the yuan but also against all currencies.

This creates political resonances around the globe and has much of its desired effects. Now, the world is pushing China to speed up its currency reforms. Much lobbying efforts can be seen from both sides. International bodies such WTO and IMF are basically stuck in the middle, giving neutral opinions and unforced warnings. China should not be as surprised as they are now. If they learn from the history, this would be how US treats its biggest trading partner. It cannot be a win-lose situation. In fact, the only possibility of that happening is when US is the sole winner.

While China is complaining that US domestic problems are not caused by them, they have to pick themselves up to adapt to the game play at the highest level. No one dares to defy the US. No one can even describe the Americans as “buxxxes”. They are just better negotiators and they fight for the best deals they could get. You have to give credit to them, really, otherwise they won’t be what they are today. Ask the Japs, the Europeans and those who had been at wars with them.

One cannot underestimate the intelligence (or stupidity…) behind all the accusations towards the currency ploy. It takes certain courage for someone with a certain status in the society to make such statements. Someone just have to take the gun and start firing. If you can’t solve the problems internally, just take them outside. At worst, we all die together and we see who recover faster. It’s a dog eat dog world out there. What do you expect? Honeymoon is over. It’s time for the real thing.

Besides, it takes all the attention away and buys the much needed time and space for the brainy guys to work out something. Many had failed as it seemed and the number of bullets left are disappointing. A big shot has to be made sooner or later. What China has to do is to admit that fact it has gotten itself a tough-to-accommodate partner and continue to live on with it. This is what happens in marriage when you start to see the true colors of your partner. Basically, this partner is in deep shit and it needs lots, and lots of help to get itself back in shape. It cannot afford a ten-year recession like in Japan. Too much is at stake. It has its people to look after even though it is these people who bring these to themselves. It’s a sad story. We must learn to give empathy in times like this (and I mean it).

Of course, China has its own domestic problems: poverty, social change, (unorganized?) urbanization and so on. Being the only large economy making growth in the past 2 years, it may have more burdens to bear now when the whole world situation has changed. It’s time to decide if China can carry the world on its back and move forward. Helping to heal US might lighten the load. China has to work out its own sums though. It has to be clear about how much percentage growth it would have to sacrifice in return for the higher valuation of its currency. It should have enough savings to stimulate the economy back by a certain percentage points. It’s not a test anymore. It’s for real. To be honest, I am still pessimistic of how much help would the revaluation of yuan will help the US. US has just too many domestic problems (mainly debts) to solve. Anyway, they are grabbing everything they could reach for to make the U-turn. So, any help is welcome, I guess.

Chinese companies can take the opportunity to expand their market to international if not regional by acquiring sales channels and distribution outside China. Employment for Chinese can be kept. Government should also be supportive in such activities. Stronger yuan will command cheaper prices for inputs. Perhaps it is time to shift manufacturing, which will take the greatest hit from the currency change, from labour intensive to capital intensive. Productivity per person should be raised. There still exists many infrastructure work for people. The same applies to service sectors such as retail, finance and IT in big cities. These changes have to be driven by the government. Only rapid and smooth transitions would keep the economy vibrant. It would be like a revolution.

The meaningless trade wars can go on so long as China can bargain back some, but not all, that it would have to sacrifice because it should be clear that after all this, no one would be truly grateful for what it has done. So what’s fair is fair. No doubt about it, the chips are definitely on side of the Dragon. The Eagle has shown its hand, so it’s up to the Dragon to take the bet or not.

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).