In 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.
Rumors 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.
That 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.
But 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?
The 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.
Despite 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.
Unlike 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.
They 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.
The 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.
The 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.
The 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.
Historically, 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.
Capital 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.
Businesses 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.
That 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.
Now 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.
May 19, 2005
Jim 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.