The Real Deal on China

Forbes Magazine just published an article by Forbes.com editor, Paul Maidment, entitled, "The Real Deal on China."  Forbes aptly summarizes the article with the comment, "Domestic politics is going to keep China from floating its currency. Time to move on to other issues."

Maidment asserts that internal politics preclude China from floating the Yuan right now: 

China's swelling $200 billion trade surplus with the U.S. and the role of the yuan's exchange rate, held artificially low to promote its exports, according to China's congressional critics, has become the focus of this debate.

But many in Congress are barking up the wrong tree in hectoring China to unpeg its currency against the U.S. dollar.

According to Maidment, viewing China as having a booming economy is an oversimplification. Though China's coastal cities are indeed booming, huge swaths of the country are not and Beijing must be and is very mindful of this:

While in the aggregate China looks like a big economy with big growth rates, big export numbers and a big trade surplus with the U.S., in reality it is a collection of disparate economic regions--and always has been.

Some of those regions, notably on the coasts, are growing at breakneck speed on the back of light manufacturing exports. But others, in the interior, are stagnating.

That is of great concern to the authorities in Beijing. There is growing social unrest in the countryside, especially in the poor western part of the country. But violent protests are on the rise in all rural areas.

And anyone who knows China's history realizes what a political hot button that is for Beijing. The overthrow of China's ruling dynasties has always started with uprisings in the countryside.

Maidment argues that China cannot float the Yuan right now because if it did, it would lower the cost of foreign goods in China and drive many rural, state owned, industries out of business.  Because these industries provide so much rural employment, Beijing simply cannot allow them to fail: 

Instead, its [China's] currency imperative is to protect the vast network of bankrupt but job-providing heavy industries that Mao Zedong scatted across China's countryside. They would be destroyed by import competition if the yuan was revalued.

That would exacerbate the social disruption and violent protests breaking out in record numbers in China's poorest regions. Beijing won't countenance that level of political unrest.

That is the political imperative that drives China's exchange-rate policy right now, regardless of how much atavistic chest thumping comes out of Washington, either while Hu is here or after he has left.

I completely agree with Maidment's analysis of China's current economic situation.  I have had many discussions with Chinese elites (lawyers and MBA graduates) on the issue of China's state owned companies and, virtually without exception, they would all concur with Maidment.  They view China's state owned entities as generally inefficient, poorly run, corrupt, and non-competitive.  Yet, at the same time, they are not ready to see them fail or to be rapidly privatized. They like the government policy of allowing them to die off slowly.  China is proud that it has not had Russian style dislocation from what the Chinese see as overly fast privatization there.  I hate to sound like a broken record here, but as I mentioned in two earlier posts (Two Views of China. Do You Want Some Syrup With That? and "China Rises -- The TV Show/"Getting Rich."), China's elites concur with Beijing's go slow reform policies:

The Chinese elite concur with the government's go slow reform policy of "crossing the river by feeling for stones."  In the show, an obviously wealthy banker talks about how this policy, first coined by Deng Xiaoping in referring to China's step by step liberalization, makes sense for China.  Those with whom I talk in China concur with this.  I think the urban elite of China concur with this not because they feel compelled to do so by the government, but because this policy has, at least so far, served them so well. 

Bottom Line:  China is not going to float its currency soon so the United States would be wise to move on to other issues.