wondering about China’s economic future could look to officials in Beijing. Or,
they could just check with Henry Kissinger.
sometimes takes a perspective removed from day-to-day market minutia to remind
us where we are. Such may be the case with the secretary of state who helped
re-establish ties between China and the US under president Richard Nixon. His
views are in big demand as China rises and US influence wanes.
Kissinger is often asked, will the shift change the world? Will there be
tension? Might the US try to slow China’s ascent to protect its turf?
real question is why China is standing in its own way. The reference here is to
China’s currency policy, and it’s an area in which Kissinger’s insights may
about China last week, one of modern history’s best- known diplomats homed in on
its currency growing pains. Economists and Chinese leaders, he said, are
beginning to feel that “a new alternative or companion currency to the dollar
would be created, built around the Chinese currency”.
the next breath, though, Kissinger explained why we shouldn’t expect that
anytime soon: The yuan isn’t convertible.
hardly news to many investors. Yet four years after China technically scrapped
its US dollar peg, currency issues remain at the core of China’s many
challenges. They stand between China’s designs on a major role in the global
economy and its chances of playing it.
not just the yuan’s prospects of one day trumping the US dollar. It’s also about
China’s economy functioning normally and officials in Beijing finding a more
productive use for $US2 trillion ($2.4 trillion) of state money. A lack of
progress on the yuan is holding Asia’s second-biggest economy back more than
officials there may realise.
is a process, piece by piece,” Yu Yongding, the Chinese economist whose calls
for liberalising the yuan heralded its 21 percent gain since 2005, said last
week. “This will take a long time. But, step by step, we have to try our
a member of the central bank’s monetary policy committee from 2004 to 2006,
wants the government to encourage more overseas investment, reduce exports and
promote sales of yuan-denominated debt by foreign companies while transitioning
from managing the currency and piling up US dollar assets.
are many reasons China won’t make the yuan fully convertible. Reluctance to cede
control in these turbulent times is one. Protecting all-important exporters is
another. Perhaps officials realise the yuan could just as easily plunge as
surge. With each passing year China manages the yuan, though, it misses an
opportunity at economic progress.
massive arsenal of reserves is a weakness. It is the result of a
counterproductive model wherein foreign consumers get to buy cheap Chinese goods
at the expense of Chinese themselves. It’s a strategy that has reached its limit
and shackled China with $US776.4 billion in Treasuries.
says those holdings “are not safe, and we should be worried about that.” China’s
reserve obsession was wreaking enough havoc with the money supply before recent
stimulus efforts. Evidence is increasing that the 4 trillion-yuan ($US586
billion) China spent to revive growth is ending up in stocks.
Shuqing, chairman of China Construction Bank in Beijing, says excessive
liquidity is causing bubbles. Clive McDonnell, head of equity strategy at BNP
Paribas in Singapore, says that in the first half of the year China created
credit equivalent to 45 per cent of gross domestic product. Continued…
bubble troubles aren’t as bad as they sound for the global economy. Its almost 8
per cent growth doesn’t remotely pack the punch of such output from the US,
Europe or Japan.
economy is the world’s third-largest and its importance as a production base
isn’t in dispute. What should be very much in dispute is that the Chinese
market, which is small, shallow and disconnected from what’s occurring in the
global financial system, matters in New York and London.
in Beijing crafted their stimulus to benefit the domestic economy. The real
issue is that China’s economy simply isn’t international enough.
for instance, China could translate more of its trade surplus into investment
vehicles other than Treasuries, there would be less pressure on the yuan. That
would allow the central bank to stop intervening in currency markets and enable
China to preside over a more balanced economy.
oft-mentioned excuse for stockpiling dollars is a lack of alternatives. Hence
the search for a new reserve currency, be it an existing one or a new unit of
exchange managed by the International Monetary Fund.
Chinese officials see the yuan as a potential replacement for the dollar. It’s a
pipedream until China eases up on its currency controls.
China can thrive in the years ahead and play a role in world trade beyond
producing goods cheaply is beyond many economists. And, as it turns out,
diplomatic celebrities such as Kissinger, too.