1999, when I was in China, the then prime minister, Zhu Rongji,
spoke at the Harvard Business School. During the question-and-answer
period, a smart aleck asked, “Are you going to devalue the Chinese
currency?” Since 1984, the Chinese currency, the renminbi, has been
pegged to the U.S. dollar, and there had been a lot of speculation
in the press that the Chinese would be making their currency convertible
– the sine qua non for China to become a truly great economy.
persisted that before the government made the currency convertible,
it would devalue it. The premier assured the questioner that devaluation
would not occur, and then invited the skeptics in the room to buy
“puts” on the renminbi. Buying puts – the right to sell or go short
– is a sophisticated way to profit from the collapse of a stock
or currency. It was an extraordinary remark from the mouth of any
politician, never mind a leader of the Chinese Communist Party.
Zhu put the Harvard wise guy in his place while proving to a sophisticated
audience of businesspeople that the premier of China knew a thing
or two about playing the currency market.
kind of financial sophistication permeates the Chinese bureaucracy
as well as the business community. Some of the best capitalists
in the world live and work in Communist China. Not so long ago,
the government denounced entrepreneurs as “exploiters” and banned
them from the Chinese Communist Party.
in 2001, then president Jiang Zemin praised business leaders for
pushing ahead with modernization; now, a political party created
to represent the interests of peasants and workers includes millionaire
entrepreneurs. And therein lies the problem: How does a market economy
champing at the bit function under a Leninist regime?
central government has been learning how to benefit from the markets
by trial and error. But Chinese bureaucrats are fast learners, supported
by talented young economists, bankers, and financiers faced with
the challenge of dealing with an unprecedented rate of growth in
an increasingly globalized marketplace. For decades, the best and
the brightest in China have aspired to careers in the Party and
the government rather than in the private sector. These people now
run China, so it should be no surprise that China has some of the
most capable politicians in the world. Frankly, we should all wish
these people well, regardless of their political beliefs or ours.
Worldwide economic growth – indeed the stability of the world –
depends on how well the leadership in Beijing manages its economy.
the challenges, it seems to be doing fine. For no matter how long
China’s leaders persist in calling themselves Communists, they seem
quite intent on creating the world’s dominant capitalist economy.
Plato wrote that the natural progression of government was from
tyranny to oligarchy to democracy, and then came chaos, with dictatorship
on its heels. China is now at the stage of moving from tyranny toward
democracy, and those in charge probably have their sleep disturbed
by dreams of the chaos that might follow that transition. By most
accounts, however, even the Party’s homegrown entrepreneurs – known
as “red capitalists” by China scholars outside the country – are
actually a conservative lot. Eager to protect their own wealth and
status, they will not be much in favor of any radical democratic
reforms too soon. They saw what happened in the USSR. These Party
entrepreneurs may end up being democracy’s Trojan horse – pushing
for the kinds of economic and legal reforms that will make doing
business easier and more productive and thus busting up the Marxist-Leninist
foundations of the Party itself. Their success has already emboldened
the tens of millions of small entrepreneurs and ambitious young
people who want to get rich.
Russia, which had a feudal society before its Communist revolution
in 1917, China, which opted for a Communist economy in 1949, has
had a vibrant merchant class throughout much of its history; many
are still alive who remember what capitalism was like before Mao
Zedong’s revolution. Many of those Chinese capitalists went abroad
to Hong Kong, Taiwan, and elsewhere to pursue their business interests.
Before the Communist revolution, Shanghai had the largest stock
market in Asia and between London and New York, and it will again.
Even after a half-century of a strictly controlled Communist economy,
the Chinese seem more culturally predisposed to capitalism than
their Russian counterparts.
also have the habits of ready-made capitalists: The Chinese save
and invest upwards of 40 percent of their income (Americans save
barely 2 percent), and they have an incredible work ethic. The Chinese
work and work to get the job done. I saw men and women working on
highways late at night under floodlights. They demonstrate the kind
of productivity and ingenuity that are required to build good companies.
conversion from Communism to the world’s most dominant capitalistic
economy will not be instantaneous or smooth. In the meantime, China
will have to settle for being the world champion in commodity consumption.
Chinese currency, the renminbi, has been extremely undervalued –
by 15 percent or more, some experts contend. Even if its currency
doubled in value against the U.S. dollar, China would still be competitive.
(The Japanese yen has risen 400 percent against the dollar over
several decades, yet Japan still has a trade surplus with the U.S.)
The renminbi is one of the few currencies in the world whose value
does not fluctuate, pegged 8.3 to the U.S. dollar, which has weakened
in recent years against the euro and other currencies.
dollar’s decreasing value means that Chinese goods and services
are a lot cheaper than they ought to be in European and Japanese
markets. The U.S. imports relatively little from China, but U.S.
politicians are nevertheless worried that China’s low prices will
squeeze U.S. companies out of markets all around the world and have
urged the Chinese government to “unpeg” its currency from the dollar.
Threats of protectionism have been tossed around in the U.S. and
the European Union, whose members have suggested that the Chinese
might consider the euro as an alternative reserve currency to the
dollar. Most European politicians and their Asian counterparts tend
to have fewer complaints about China, since they sell huge amounts
of their goods there, and many of those nations have trade surpluses
with China. Rarely does anyone complain about their best customers.
China’s leaders have been afraid to let their currency float, presuming
that its citizens would move money out of the country and the renminbi
would collapse. A higher rate of exchange would also slow foreign
investment and exports, another threat to the economy. The Chinese
leadership still uses that argument as a means of refusing to revalue
the renminbi. It would have had merit 20 years ago, but China is
a much more attractive investment opportunity now. Let the currency
go down, I say. If people want to dump the renminbi, go for it.
I would be a buyer whether it declines or rises, and I doubt that
I would be alone. Nor do I think that the overseas Chinese will
stop sending money home or abandon investing in one of the world’s
largest and fastest-growing economies. I suspect that once the Chinese
currency floats, even more funds will pour in.
is always more likely to go where it will not be trapped by currency
controls. But the best argument against a fixed currency is that
it has never worked and it never will. No fixed currency in history
has ever been able to maintain its peg. Another argument that should
appeal to the Chinese leadership, which is extremely nationalistic
and sensitive to the charge of sucking up to Washington, the capital
of “capitalist roaders”: The renminbi is in a possible position
to take over as the dominant currency in the world, beating out
the euro, the yen, and the dollar.
around the world have long sought to sell to the American consumer.
By 2004, China had passed nearly everyone as one of the world’s
largest importers of goods. Now, every businessperson in the world
salivates as he or she calculates the current price of a product
multiplied times 1.3 billion Chinese. And though China is buying
more stuff from the rest of the world than ever and has finally
racked up a trade deficit, its vaults are filled with stacks of
foreign currencies – more than $400 billion worth, second only to
Japan. China is a creditor nation. The U.S. became a debtor nation
again in 1987 and has been the world’s largest debtor nation since.
The international debts of the U.S. are more than $8 trillion and
growing, at the rate of $1 trillion every 21 months. For years,
we have been financing our standard of living with other people’s
money, and one of our biggest bankers is China.
dependency makes the renminbi a perfect candidate for a world currency
– once its leaders allow it to be freely convertible and tradable
on the world market. The sine qua non of free trade is that people
can come and go with their money. When that will happen in China
I do not know for certain. Surely, however, the Chinese have been
feeling the pinch of buying commodities at high prices and selling
goods at cheaper ones. One thing’s for sure: China’s leaders will
not unpeg the renminbi to the dollar just because foreign politicians
say they must. Ironically, when the Chinese pegged their currency
to the dollar in 1994 the U.S. applauded it as a smart move.
that we are begging them to unpeg it, they are bound to express
their independence by letting the renminbi float in their own good
time. China has been accepted into the World Trade Organization,
which requires that its members have convertible funds. I suspect
that the renminbi will be floating quite freely by the time the
Olympic torch is lit in Beijing in 2008.
Rogers helped found the Quantum Fund with George Soros. He has taught
finance at Columbia University’s business school and is a media
commentator worldwide. He is the author of Adventure
Capitalist and Investment
Biker. See his website.
He lives in New York City with his wife, Paige Parker, and their
18-month-old daughter, who is learning Chinese and owns commodities
but no stocks or bonds.