October 17, 2005

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A Question Of Maturity

BCH offers the least of many reasons China should not radically revaluate the yuan, as the Bush administration is asking.

Administration officials say the plan is part of an effort to put the yuan into a broader debate over China's lopsided reliance on exports as the main source of economic growth. The plan, to be discussed in two days of talks here and in Beijing, calls for China to speed up the privatization of state-owned companies, including banks; to develop a Chicago-style futures market for currency trading; to establish an independent credit-rating agency; and to crack down on bailouts for banks left holding bad loans.

David Barboza offers an illustration of what revaluation means for Chinese companies.

Led by such trade gains, China's economy has been sizzling hot, bringing in so much money that Fitch Ratings said on Friday that China could in 2007 become the first country with more than $1 billion in foreign reserves; as of the end of last month they totaled $769 billion, the central bank said on Friday. Beijing is worried that strengthening the currency rapidly and sharply could be too much of a shock for the economy, perhaps even forcing companies to lay off workers.

Some economists say China's golden years are already coming to an end. And foreign manufacturers will not have it so easy. "The big question is what will happen over the next few years," said Jonathan Anderson, chief economist in Asia for UBS. "Wages and costs are going up in China. The economy is already past its peak. This is no longer the easy money you had in 2002 and 2003." There are fears that if China's currency appreciates sharply, some manufacturers will be forced to raise prices or shift their production to other low-cost regions, like India or Southeast Asia. Multinational companies that manufacture in China are already drawing up contingency plans.

According to Bloomberg, FDI trends are already mixed. In short, China's economy has already reached a point of maturity, but just as in previous periods of growth in its history, economic development is uneven.

Furthermore, as William Pesek, Jr. points out, the Bush administration is just wrong about comparing China to Japan or the former Soviet Union.

China is considerably less wealthy than Japan, and far more reliant on trade. So if Snow thinks his trip to China this month will result in a further strengthening of the yuan, he is mistaken.

Yet China is already more intertwined with the global economy than the Soviets ever were and its embrace of capitalism is more progressive. China's economy also is more stable and growing much faster than the Soviet Union's ever did.

Unlike the Soviet Union, which used fear to bend others to its will, China is using economic diplomacy. It has chosen integration and the promise of robust demand for trading partners' goods, rather than confrontation.

China, in part by buying so many U.S. Treasury bonds, also has made its relationship with the world's biggest economy symbiotic, a step the Soviets never took.

So, stop calling the Bush administration bullies. They're idiots!

Cross-Posted at Barbarian Envoy

posted by Infidel on 10.17.05 at 09:38 AM in the China economy category.


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