Friday, 20 August 2010

Some Yuan for Ringgit please - China’s economic muscle expands

Watch a corporate big-wig on financial television and she is certain to mention China as the key growth market for the future. At best, the United States (US) is a footnote or, at worst, a drag on sales growth.
A few days ago, the world formalized China's new status as an economic powerhouse: China was declared the second largest global economy. Some commentators suggest China will overtake the US as the premier international economy sometime during the next decade.
A Chinese Yuan coin minted in 1924

Surely, such statements are true but they hide other facts.
Much of China's population still lives in primitive conditions. Social problems caused by unchecked industrial growth, including pollution, are worrying. Nevertheless, China's economic transformation since the late 1980s is nothing short of miraculous.
The stability of the US Dollar and, hence, much of the international economy rests upon China. The deployment of China's USD 2.6 trillion reserves is a key determinant of currency exchange rates.
It used to be said that when the US sneezes, the rest of the world catches a cold. Now that the entire world is down with flu, the only healthy country left standing is China. If China succumbs to the US flu, then the already weakened world may catch pneumonia!
For its part, China does all it can to maintain economic growth – for domestic reasons. Of preeminent concern to Chinese policymakers are not US politicians growling about the USD-Yuan exchange rate but the need to keep the enormous Chinese population gainfully employed and out of trouble. Gangs of desperate unemployed people are not as easily deterred by the death penalty as protesting urbanized college students.
Among China's initiatives are various policies designed to reduce its dependence on the US economy and the US Dollar. China has established domestic commodity exchanges and is slowly diversifying its reserves away from the US Dollar. A few days ago, China announced it had purchased several billion dollars of South Korean bonds.
The long term implications of China's financial policies are far reaching.
Hong Kong's role as a conduit for China will diminish as Shanghai establishes itself as a more logical financial centre serving the mainland. Financial services are not a zero sum game, but Singapore will benefit at Hong Kong's expense. Singapore and Hong Kong's compete for the title of financial hub in Southeast Asia.
Slowly but surely, the Chinese Renminbi is becoming an international currency, a natural corollary of China's international trading status. Here too, Chinese policy makers are smoothening the Yuan's path. The most recent step permits onshore trading of the Yuan-Ringgit currency pair. Small, incremental but steady steps by China's Central Bank.

In the 1980s, it was believed that corporate Japan would soon own the world. After two decades of slow to no growth, Japan has been replaced by China. Is China poised to take over the world in the next few decades?
The US Dollar or US influence will not be replaced by China anytime soon. It takes decades, if not centuries, for imperial domination to wither. Neither will the Yuan replace the US Dollar anytime soon nor will China's international influence overtake the US.
However, as the world moves to construct a post-Bretton Woods economic order, betting on China does seem a higher probability trade than betting on the US.

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