|
|
|
|
It's not the yuan,
silly
By Francesco
Sisci
BEIJING - First, they said it must be
devalued. Now they want it to be "revalued".
It was the eve of the 1997 Asian financial
crisis when the world first raised the chorus for
yuan's devaluation. The logic of the markets then:
the economy is in a shambles and the banks have
run up unmanageable debts; if the yuan is not
devalued, Chinese exports would soon become too
expensive to hold their position and foreign
capital would stop flowing into the country.
The Chinese government then thought there
was little to gain from devaluation. It would
trigger another round of competitive devaluation
from other Asian currencies, which would eat into
the newfound advantage of the yuan. So Beijing
decided to hold on to its fixed peg to the dollar
and boost exports by cutting taxes on exporting
companies so that commodity prices went down in
dollar terms. The strategy won. Asian currencies
stabilized, the dollar went slowly down vis-a-vis
other Asian currencies and the new kid on the
block, the euro.
The lesson that China
learned was that with currencies, one should not
lose one's head, even if everyone else in the
market is losing theirs. This is a lesson worth
keeping in mind amid today's chorus for
revaluation. Pundits point at China's long-lasting
trade surplus, the gains in its labor
productivity, the bulging foreign reserves, the
low inflation rate and the country's contribution
to global growth to draw the conclusion that yuan
is going too cheap. Among their many arguments: a
can of Coke or a Big Mac in China costs half of
that in the United States, hence the yuan must go
up 20-40%.
Reams have been written on how
billions of dollars of hot money are waiting in
the wings for the revaluation before entering
China. The pressure of this hot money is even more
compelling than the threat of high costs for
exports that a revalued yuan would entail. The
central bank has to intervene to sterilize this
money, and this puts further pressure on the
banking system, already creaking under piles of
bad debt.
One more bandied about
suggestion is to broaden the exchange band and let
the yuan shoot up by some 10%. But if that were to
occur, it could well trigger bigger problems. Hot
money would have one more reason to come in.
Japan's economy is improving but it is still weak
after over a decade of crisis. The US is doing
well but question marks over its huge deficit and
the weak dollar persist. The euro, trading now at
about $1.3-1, doesn't represent a vibrant economy.
The European economy in fact can't get moving past
a lackluster 1% growth. The task of successfully
digesting former East European economies into the
main frame of a new Franco-German economic
coalition will take years. All these destinations
for international capital thus look gray if
compared with China's 9.5% growth rate for the
past quarter of a century. Given the country's
steady growth, any revaluation of the yuan would
only open the floodgates to hot money.
Moreover, China might not be ready for a
huge flow of investment into or out of the
country. Its stock exchange is, basically, a waste
bin. It's the legacy of a time when the state used
the share market to rip off small investors to
finance non-performing state-owned enterprises
(SOEs). But there was a moral angle to this
rip-off: the SOEs were supporting workers and the
social fabric of urban China. The state and the
market needed reform and reform needed money, but
there was none available. At the same time, there
were lots of people making money, often walking in
a gray line between legal and illegal in the
shifting paradigm of China's economy in the 1990s.
But this money was hard to invest because of the
lack of investment tools and also because the
aspiring investors were not too keen on explaining
how they made that money.
So the stock
exchange worked for both the investors and the
state: it gave the state the cash for reform and
investors an avenue to distil their ill-gotten
money. Even if they were to be ripped off, they
couldn't complain too much - the money was easy
come, easy go. Thanks to the stock exchange, the
state would reap the taxes these investors had
evaded in the first place. Hundreds of SOEs were
thrown into the market, to be treated more like
gambling chips than long-term investment tools.
The present stock exchange still retains many such
companies that shouldn't have been listed in the
first place or de-listed a long time ago.
Banks are in no better health either.
Deposits vastly exceed investment, which means
banks are failing to invest properly. The bank
spread between interest on deposit (about 1%) and
that on credit (over 5%) is huge. This problem of
inefficiency of the banking system is much graver
than the bad debt problem. Bad debt is the legacy
of a time when banks served as the state's
financial arm to deliver aid to the SOEs. These
debts should simply be written off and included in
state accounts instead. But if this is done
without improving the efficiency of the banks, it
would be of little help.
More serious than
the problem of bank management is that of the
quality of credit. Nobody in China will reveal to
his bank how much money or property he owns. Banks
are not known to keep such secrets, and squeal to
the tax bureau and police. Whoever has any money
in China didn't get it clean - "primitive
accumulation" in Marxist terms. The Americans had
slave trade, the Chinese a murky economy in which
some made fortunes while others had their heads
chopped off. China has had a muddled legal
framework, where the line between the legal and
the illegal has been a very fuzzy one. Almost
everybody in China has done something not
perfectly legal with his or her money. In the
past, even subletting one's apartment could make
one liable for persecution. Thus no one wants to
volunteer information on their wealth to the banks
and risk a police inquiry into past history. So
banks are mainly left with SOEs as their main
clients, no surprise then that half the Chinese
money is cash circulating outside the banking
system.
But money must go back to banks as
cash transactions are clumsy and open to
deception.. However, for banks to be trusted and
not seen as conniving with tax and police
officials, there needs to be some kind of an
amnesty for past economic "crimes" - something
that would pardon, say, tax evasion, but help
isolate cases of drug trafficking. Free flow of
foreign money in China before all this is done
could destabilize the Chinese economy.
Moreover, there is the US. According to
Chinese scholars, over 50% of America's daily
consumer goods come from China. An appreciation of
the yuan by 5-10% would push up prices by about
1%. Again, the dollar would go further down and
the euro further up. One isn't sure if that would
save any jobs in the US, but hot money rushing in
and out of China could well disrupt the Chinese
economy, and by extension global finances. China
is not sure if it - or anybody else for that
matter - would gain anything from this, apart from
some currency punters. But it certainly would be
in the interest of everybody, including China, to
broaden the currency band by some 5% and slowly
create a basket of currency to peg the yuan, a
basket that also includes the yen and the euro.
Anything short of this would undermine the
stability of the yuan and threaten the world
economy.
Francesco Sisci, based
in Beijing, is Asia Editor for the daily La
Stampa. His views are his own.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
0106Ą78 Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
|
|
|
