January 24, 2005

The great march of China

Posted in People · 2 comments ·
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By the end of next year, 2 per cent of our population will be Chinese. This may be an extraordinary statistic, but in fact it should not surprise us. Walk into any Spar, Centra, Texaco or dry cleaner’s and you will see them – young, hard-working Chinese students.

Few Irish restaurants, bars or coffee shops would function without them.

Griffith College in Dublin has over 1,000 Chinese students enrolled this year. A significant section of the English language school industry – which used to depend on Spanish students � now lives off the new Chinese.

Make no mistake about it: our economy and our prosperity depend in part on these Chinese twenty-somethings – without them, many Irish firms would go to the wall.

Not only will these Chinese immigrants influence our future, but China itself will shape our century. Most of us have become used to the idea that China is a major player in the global economy.

Twenty years ago, the country barely rated a mention; ten years ago it was beginning to show up on economists’ radar screens.

Over the last three years, since it joined the World Trade Organisation, China has become the most dramatic – and arguably the most important � show on the global stage.

The big question is what is next for China. Will its march to economic ascendancy be smooth, successful and orderly, or will it be problematic, volatile and dangerous?

In the short term, most investors, politicians and commentators are focusing on trade opportunities, the Chinese currency and the impact on the US dollar of China’s enormous trade surplus with America. But in the longer term, the big issues concern the impact China will have on our societies and how we in the West will respond.

Let’s look at the short-term issues first.

The key here is the currency.

For the last ten years, the exchange rate of the Chinese renminbi (or yuan) to the US dollar has been fixed in a very narrow range, around 8.28CNYto $1.This tight exchange rate regime means that the Chinese central bank – the People’s Bank of China – is required to defend that rate. So, despite the growing trade surplus with the US, the Chinese currency has remained absolutely stable.

This state of affairs is intolerable, both for the Americans and for us Europeans.

The Americans need the Chinese to revalue because China’s trade surplus with the US is rapidly swelling. If a weaker dollar generally is a necessary condition for the US current account deficit to shrink, then the dollar must weaken against the renminbi as well.

The Europeans endorse that argument wholeheartedly because, so far, we have been obliged to carry the main burden of the dollar’s decline.

The Chinese have had a free ride: their currency is pegged to the dollar, so they maintain their competitive position vis-a-vis the US, while the fall in the dollar’s value against the European currencies has meant that the renminbi, too, has been devalued against these currencies – thereby improving China’s competitive position vis-a-vis the euro.

So virtually the entire world wants China to revalue – and the pressure has grown in recent months. The Chinese government and central bank, however, are not keen on revaluing – least of all under pressure from foreigners, especially the US.

They have a long-term strategy for gradually opening up their financial system, which will require them to sort out their very wobbly banking system and slowly remove the exchange controls, so that the renminbi eventually becomes a freely-convertible currency, traded openly on global markets. But that is a goal to be reached ten or more years down the road, as far as the Chinese authorities are concerned. This long-term and gradualist approach is now under serious threat – and with it, the entire Chinese financial system.

The supreme irony of this situation is that the people mounting this threat are not Western governments, or shady speculators operating through offshore shelters on exotic Caribbean islands, but rather the Chinese people.

The situation today on the streets of Shanghai is that tourists seeking to sell dollars for yuan are unwelcome. �Haven’t you got a currency other than American dollars?� is the question the dealers are asking – because they and the entire market are awash with greenbacks.

The source of this flood of dollar selling is Chinese firms and wealthy individuals (of whom there are now plenty),who are convinced that a revaluation is inevitable and are intent on divesting themselves of the dollars they have hoarded, legally or illegally, over the years.

They are being joined in this effort by their family and friends throughout Greater China, and, indeed, throughout the ethnic Chinese �migr� communities stretching across Asia and North America (and even into Europe). All these people see the yuan as a one-way bet and are selling their dollars. The only buyer in sight is the People’s Bank of China, which is required to buy ever-larger quantities of dollars to preserve the exchange rate. In short, what seems to be happening in the narrow confines of China’s foreign exchange market, is a showdown between the People’s Bank of China and the people of China.

Experience garnered around the world strongly suggests that, in contests of this kind, the market wins and the authorities lose. Therefore it would seem that the next big story in the history of China will be the first defeat ever of the Communist Party at the hands of the people of China – in the guise of a very capitalist revaluation of the currency.

But what of the big picture?

What impact will China have on you over the next few decades? China’s impact is best seen in the consumer durable shops all around the country. China is having a remarkable effect on the price of manufactured goods worldwide.

Because the cost of production is so low in China, and so much western investment in China is aimed at making stuff there and reselling it in the West, China is setting the floor for prices in everything from mobiles to computers, staplers to office desks. The question has to be asked: how can any western country compete with 50-cent-an-hour factory workers?

And what happens?

Manufacturing jobs will migrate to China, just as agricultural jobs did to the US in the 19th century.

However, the main difference between now and then is emigration. Poor Europeans will not emigrate to China as millions of poor Irish did to the US in the 19th century. In fact, the emigration of Chinese students the other way is likely to continue.

So poor Europeans will suffer in two ways from the emergence of China. First they will be actively competing with new Chinese immigrants in the services sector at home in bars, cafes and restaurants. If they are in European manufacturing, their wages will be gradually reduced as investment moves to China.

History suggests that the West’s reaction to the new China might be initial euphoria and fascination, followed by economic insecurity and ultimately closed doors to trade.

The beginning of the Age of America coincided with the so-called �gilded age of free trade’ from 1860-1914.This was followed by a great age of protectionism from 1918-1948.Who’d like to bet against history repeating itself in the 21st century?


  1. Tom Lupton

    David,

    There is much to be said about the possible future course
    of China, but like all crystal ball projections reality
    very often takes a different turn.

    Most analysts of the economy study financial events, few
    understand political impacts, and in the case of China,
    whoever looks at China solely as a manufacturing base for
    exports is missing the boat. It’s the domestic development
    and the propensity by which it generates internal
    consumption.

    The biggest challenge of the centralist Chinese government
    is the ethnic diversity und the underdevelopment of ~ 1
    000 000 000 people (+ 300 000 000 already can be looked at
    as consumers in our terminology), the development of the
    infrastructure and environmental issues.

    Have you seen any communist state which parallels China’s
    development, and all with it’s own resources?

    The strength of the Renminbi hurts USA and Europe, but
    look at who is doing the business and reaps the cash, its
    US and European investors. So no use crying and blaming
    the Chinese for it all.

    As you said yourself they are hard workers, and maybe some
    laidback economies particularly in Europe, who have relied
    on handouts from Brussels for too long, do feel the pinch
    already.

    Best regards,

    T.

  2. John Bennett

    There has been alot of talk over the last few years about
    the prospects of China becoming the next superpower. It has
    been compared to the emergence of the USA as a superpower
    at the beginning of the 20th century. However there is one
    big difference between the USA then and China today the USA
    was abundant in natural resources. It had bounties of
    steel, timber, coal and oil which it used to propel it to
    superpower status. China is not abundant in natural
    resources and is dependant on other countries for its
    supply. If China is to become a superpower it will probably
    have to flex its muscle militarily which would mean a
    showdown with the USA. In a world of tightening resources
    could we see China befriending countries in the middle east
    such as Iran in return for oil and sparking a new cold war
    type of conflict. I think the 21st century will be more
    about the scramble for resources rather than consumers. We
    could be seeing a move from consumerism back to producerism
    with countries having the access to resources and
    production having the real power like Britain at the start
    of the industrial revolution.

  3. David Mc Williams

    Interesting points about the rise of China. I think John
    is right about resources, whike Tom is right about blaming
    China. I expect the “blame China” lobby will get very
    strong over the next few years.

    David

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