The China Miracle 3.0

A gradual appreciation of the Chinese currency, although probably too gradual for some in the west, signals a far more fundamental evolutionary phase for this nation than currency management.The system of managing the Renminbi (RMB), or yuan, against a basket of currencies has really been in place since 1994 and put on hold during the two periods of crisis subsequent to that. Some western commentators had hoped that the easing of the regime announced in June would signal a significant revaluation in the short term, which hasn’t eventuated.

But the revaluation that is underway is significant enough – probably 3-5 per cent a year – especially against the backdrop of how China is approaching the next stage of its phenomenal economic development.

If the first phase represented the unification of China and lifting the majority of people out of desperate poverty and the second phase the industrial and urban development, export boom and new middle class, then the third phase is all about sustainability and equity.

The Chinese authorities recognise, at least from lots of speeches on the subject, that the next phase of development will be very different, involving costs which will be difficult to recoup in the short term.

The ‘China Daily’, a government-owned English-language newspaper, which is hardly a bastion of liberal thought, carries regular news and commentary about quality of life issues in China. A recent report, for instance, questioned the value of China surpassing Japan as the second-largest economy, by GDP, in the world when the per-capita level still ranked the country outside the top 100.

Pollution and congestion in the cities are widely discussed, with various alternatives canvassed for their reduction, such as additional private transport tolls. Even though Beijing has only about four million vehicles, for a city of 16 million, the number of new cars in the city each month is staggering. A report this week, which looked at a London-style city car toll, estimated that in the first seven months of this year, Beijing had to cope with an additional 1,863 new vehicles every day. Last year, about 531,000 new vehicles found their way into Beijing. If this year’s trend continues, the growth will rise to 680,000 by December.

Huang Yiping, professor of economics at Peking University’s China Center for Economic Research, says in another ‘China Daily’ article recently that it is in China’s interests to respond internationally to renewed international criticism of its managed currency. The critical issue is not the policy regime, but the actual exchange rate.

He argues for greater emphasis to be placed on the full basket of currencies and not just the greenback.

And that a steady revaluation, of, say, 5 per cent a year, is needed because of China’s own “changing economic conditions”.

He says: “A stronger currency is consistent with China’s policy objective of shifting the economy away from exports and investment toward consumption. It would facilitate industries’ shift from producing low value-added goods to high value-added products and, therefore, support sustainable economic growth.”

Smarter China investors have already shifted their allocations away from smoke-stack industries towards the growing service areas such as health and old-age care, IT, educational, financial and urban development services.

As an aside, one thing the Government could do for the yuan, from the people’s point of view, is work harder at stamping out counterfeiting, possibly by moving to plastic-based notes.

I have accepted, courtesy of a Citi automatic teller machine I think, two fake 100RMB notes in the past week. The note is China’s largest in circulation (worth about $14.75).

Shopkeepers either examine each note with the naked eye or invest in scanner machines to test their authenticity. ATM users try not to notice.

Greg Bright is the Beijing-based publisher of Top1000Funds.com.