There has been a lot of saber rattling, this year, from Beijing about the U.S. dollar, U.S. Treasury securities, and the Chinese Yuan.  We even read an article saying that as the Yuan becomes a major reserve currency, it will be good for the value of Chinese art.  Our opinion of all of this can be summed up as: what a load of crap!  The truth is that the Chinese are just jockeying for attention and recognition, and, like, in most cases, they want it without the requisite hard work that it takes to become truly successful and respected.  It is like a child trying to get attention or a barking dog.

First of all, the only reason that the Chinese have been successful in the exports markets is that the Yuan  is underpriced, so Chinese products are cheap to the West, on the one hand, and Chinese people, in general, cannot afford to buy Western products, which they would love to buy, on the other.  While people might pay lip service to the miracle that is the Chinese economy over the last two decades, in which it has gone from an agrarian economy to one, in manufacturing, that has had its costs to the rest of the world, in a number of ways.  It has been done, first of all, at the expense of the environment, not only of China, but the whole world.  The pollution from China is so great that it can be seen from space, and there are deposits of heavy metals on the Rocky Mountains of America from prevailing winds.  Its cheap products have put millions of workers from other countries out of jobs, not because China is producing superior goods or labor, in any industry, but because the underpriced Yuan has made it difficult to compete, on price, in the international market.   Even more, while the Chinese workers have benefited from the industrialization by getting a job and barracks-style living arrangements, they had not gotten other benefits that other workers around the world see as common.  In fact, they have not even had the benefit of the free flow of information from the outside world, which could have shown them what there labors were truly worth in the international market place, and, in the end, the real profits have been made by other people.

Now, China has been setting its sites on becoming more than just a large machine that produces cheap goods.  It wants to replace its low-tech industries with high-tech, and it wants to gain international respect, but it has a long way to go and many obstacles to overcome.   In addition to the stated goal by the government to turn from low to hi tech and the recent employment legislation that puts pressure on low-tech industries to the point that about a million businesses closed their doors, last year, we saw Lenovo buy IBM’s microcomputer business.  However, to move into hi-tech requires a solid educational system, which the Chinese do not have, and Lenovo’s purchase shows how little the Chinese understand about hi-tech: a similar purchase of Compaq by HP, back in the beginning of the decade, was already considered such a poor business move that the CEO of HP lost her job over it.  Time Warner thought that it would be even smarter to buy AOL; now, the marriage is over.  Some technologies have already become fungible.  It is new innovative technology that is true hi tech, and that takes innovative minds, trained in an creativity-based grade-to-graduate-school education system, not rote learning.

The other barking that China has been doing lately is trying to talk down the importance of the dollar and suggesting that its currency should gain more acceptance, in the international community.  For example, in the fall of 2008, China suggested that it might not buy any more U.S. Treasuries.  Beyond the folly of such a remark, trying to provoke, it could only have done harm to its own existing huge position in U.S. Treasuries because by talking them down, they would have suffered paper losses, at least.  In truth, China did go so far as to sell some Treasuries, in January of 2009, but it began accumulating them, the next month, as did other entities, in China, besides the government.

As far as concerns China’s aspirations to become a reserve currency, those are sheer fantasy.  First of all, as it stands, the Yuan is in a pegged currency, not allowed to freely float against other currencies in a market or even to be freely traded in markets.  In such an exchange rate regime, the central bank is the only buyer and seller of the currency, which also means that a person cannot open an account outside of China and freely keep and trade the currency.   Albeit recently, the central bank has exchanged RMB with foreign central banks, it is more like window dressing to give evidence of its international currency ambitions.   Am additional problem of the combined undervaluation of the Yuan and  the sole buyer position of the central bank is that the massive foreign currency reserves held by the central bank (about half of total assets in the last data released by the China Central Bank) would come down substantially, in value, in the event that the Yuan was allowed to freely float and move to a more reasonable purchasing power parity valuation.

Of course, when it comes to thinking about revaluing the Yuan, we also have to think about the large position in U.S. T- securities that the Chinese government owns.  Again, if the Yuan were to appreciate, all of those holdings would decrease in value.  Indeed, in the last year there have been a number of articles, in the Chinese press, about how the U.S. tricked the Chinese into buying Treasuries.  However, it just shows, once again, that there is a lack of understanding and forethought about the intricacies of international finance, within the government financial sector, in China.  It is the same lack of forethought that led the Chinese to try to denigrate the integrity of Treasuries recently: apparently not having thought out the financial consequences, for China, of negative comments about securities in which they hold a large position (only a crazy professional trader would do such a thing; not a rational one).

The compelling quality that is needed in a reserve currency, though, which China has a long way to achieving is confidence since that is all that modern currencies, which are backed by nothing by words and respect, since currencies went off the gold standard, in the 1970’s.  In a system that is completely controlled by the government, including the free and fair flow of information, that will be extremely difficult to accomplish.  Indeed, beyond the fact that information flow is controlled and censored by the government, even the statistics that the government releases about economic and financial data has been questioned by a number of authors, over recent years.

The same can be said for China’s desire to have Shanghai become the future financial hub of the world.  That, again, takes respectability and confidence and, in addition, requires a knowledgeable pool of financial professionals plus a large network of contacts.  Italy invented financial markets and instruments during the Middle Ages.  Over the intervening 600 years or so, the center of the financial world has migrated to Amsterdam, then, London and, then, New York; each of those shifts was preceded by several hundred years of base building, paving the way with accumulated knowledge, relationships, capital, and trust, before the shift was putatively accomplished.  Based on those statistics, alone, a shift to Shanghai is not in the cards for at least another century or two.

All in all, China and its protestation and campaigning for recognition in the real world of technology, money and finance is simply a naughty economic child vying for attention from its upright parents and the neighbors.  Instead of being a barking dog, trying to convince passersby that it is ferocious, it should realize that anyone who knows dogs will know that it is just starving for attention.  Indeed, their recent words and actions demonstrate that they are not ready even to begin to long trudge that long road that has taken others to where they want to go but, again, seek to find a shortcut, which may have worked in its drive to industrialization, but will not work in its lobbying for financialization or respect among the respectable.