Export hardly an elixir for China's rise

10:38, June 25, 2010      

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Facing upbraiding from major economic powers for the tightly-regulated currency policy for so long a time, China needs to come out of the shackles and think creatively about free convertibility of the yuan. It's futile and dispiriting to keep wincing before external pressure.

The theory goes that the gross domestic product is fired by three cylinders – home consumption, investment and exports. As Chinese consumption has kept going up at double digits and investment has never wrinkled during the first decade of the century, exports, which eked out this country's first success story of Mr. Deng Xiaoping's China-rise plan, could take the bench for the moment.

Or at least, the backward export mix of low-value, labor-intensive, and mostly processed products must be upgraded.

As China's economic juggernaut is poised to become the world's second largest this year, and the world's longest high-speed train will flash between Beijing and Shanghai late in 2011 (with more lines under pavement to link nearly all the provincial capitals), it is time to render the global position of the yuan. Why cannot the middle kingdom work out a five-year or 10-year plan to make the currency a global reserve tender?

Many still have legions of concern about the implications of a freely convertible currency on the country, especially, queries about the country's export prospect, competitiveness of its work force, and, sustainability of the domestic market growth.

But, we could make ourselves fairly assured with our resolution to push forward ongoing reforms: spearheading knowledge-based high-tech and new product export (such as wind turbines and solar cells), building a world-advanced bullet train system and other infrastructure, and continuing vigorous social welfare expansion to inspire home consumption.

And, a freely convertible currency will engender China's incorporation with the global system, and a reserve currency of the yuan will enable the country's entrepreneurs to make better use of world's resources and create more jobs and wealth in less-developed countries, such as in Africa.

To China's central bank, a hard currency of the yuan might help it control inflation, though invisible risks of money management difficulty could prop up, say, possible gyrations of China's capital markets ransacked by speculative hedge funds. But, China is not supposed to balk at the challenge.

There are signs that the country's policymakers are steadfast to bring the domestic currency to the world stage. The central bank has decreed to extend the yuan's usage beyond the borders. Starting this month, Chinese businesses are allowed to settle trade and investment with their foreign partners with the yuan, provided both parties do not oppose.

And, the central bank restarted the yuan's exchange rate flexibility reform, after a de-facto 20-month pegging to the U.S. dollar amid a hope to mitigate the impact of the global financial crisis. From now on, the yuan value will follow volatilities of a basket of currencies on the market, and, is expected to go up or down on a daily basis against the dollar, the euro, the pound, the yen and the won.

The above two measures will make the currency more market-driven, and at the same time, enable the regulators to test the waters for any eventual free convertibility of the yuan in later years.

For the outside world and China's trading partners, they could take positions to facilitate a huge developing economy's integration to the global market. The course could take some time before China feels confident enough with the experiment and proceeds to free convertibility. Surely, China does not want to bundle it, and, I think, its major partners ought not to exert pressure on it to throttle the course, for a besieged economy in China never helps a world hit hard by a giant crisis.


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