China would be stupid to revalue its currency

Wednesday, April 20, 2005

According to the rules of the IMF (International Monetary Fund) a developing country will only prosper by privatizing its national infrastructure, by making its currency freely convertible and by reducing the influence of the government on its markets which shall be opened up to foreigners.
China has been very wise not to adhere to this "advice". Remember how the Asian "tigers" were crushed into a recession because they did away with currency regulations in 1997? Thailand lost all its forex reserves in a matter of weeks after foreigners were allowed to participate in the currency, bond and equity markets by first driving up the Thai Baht and the Bangkok exchange and then selling it all short on a massive scale. Or have a look at Bolivia where the IMF demanded the permission for international participation in the Andean country's state owned companies as a precursor for strongly needed development aid. The result were soaring prices for water, gas and electricity to the point where the locals could not afford their daily need of drinking water anymore. After the privatization of the water companies the foreign investors did not even refrain from installing coin operated water taps: If you had money, you had water. If not, well look for drinking water elsewhere.
China has been smarter. Instead of returning international loans to the creditor countries by awarding the contracts to the said western multinationals, it only accepted limited joint ventures where full ownership will fall back to a Chinese entity after some time. Germany's BMW for example boasted recently about having built a car plant in China that emulates Bavarian quality standards.
This actually benefits the developing giant who will have the cake and can eat it too. Give it 20 years and the Chinese will have a huge pool of initially German-trained engineers and workers that will continue to manufacture wholly domestic cars. Thinking about China's laissez faire attitude to copyrighting it will be well within our lifetime that we will see "BMW" (BongMingWan) cars being rolled out on western markets that will sell for half of what a "Beamer" from Munich will cost then. The Far Eastern giant will not let its car market - already the biggest in the world - be dominated by foreigners.
The IMF's approach to developing the developing countries mostly benefitted only those multinationals getting the contracts, forced relocations were as well ignored as the environmental damage that came with the mega projects. China does it his way.
The loud demands of the G7 and especially the US for a deregulation of the Yuan fare the same fate. China's finance minister has already warned speculators not to bet on a revaluation of its currency. Basically he just parrots former US president Richard Nixon who used to say "the dollar is our currency but your problem". In the past the USA has successfully used exchange rates to shield its economy against foreign competitors. Right now the US exporters are profiting again from the weak dollar that gives them a solid competitive advantage. Being the only country in the world that repays all its debts with its own currency they cannot be interested too much in a stronger dollar as that would inflate their debt payments. Inflation is certainly the cheapest way out of its 8.8 trillion dollar debt that currently grows at a rate of more than 2 billion a day.
China learned one lesson from the currency markets wild gyrations in 1997: Don't lose your head in the markets, even if every market player is losing his. With billions of hot money waiting to enter the Chinese currency market on the wings of a revaluation this would only escalate China's difficulties in managing its stable growth on the current high level of 9 percent.
The formerly poor members of the world family meanwhile begin to question the influence of the US in international finance.
Recently the G24, an association of smaller developing countries, has requested more adequate representation in the IMF and the World Bank in the light of the fact that not the developing countries but the USA are the biggest international debtor nowadays.
Let two numbers speak for themselves: The political representatives of 250 million Americans are demanding that almost all global savings of more than 5 billion people end up in their hands to be spent mainly on a military apparatus that is considered oppressive in most corners of the globe - this will soon lead to a massive outcry towards a rethinking how the world's savings shall be distributed.


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