There is a critical lack of information about the Chinese economy, so the rest of the world needs to drive a hard bargain before it supports the liberalisation of the country’s currency, writes Kerry Brown.
When people outside China think of the liberalisation of Chinese renminbi (RMB), the official currency of China, it is opportunities that arise from this that most come to mind. Finance centres like London, Singapore, Sydney, and Hong Kong will all, presumably, see rises in currency trading. For companies trading with China – or elsewhere, for that matter – there will be the opportunity to use a new currency to settle invoices, saving on transaction costs and at least competing with the US dollar, the Euro or the Japanese yen.
There is another angle to this story, however. In the past, during the 1998 Asian Financial Crisis, and Great Financial Crisis a decade later, Chinese policymakers argued that having a non-convertible current account meant they were protected from the vagaries of the outside world. These days, however, it is the other way around. The outside world is at least insulated from risk within China, of rising debt, possible fund defaults and the other worrying things that are starting to emerge. In view of that, the question now is not so much for the world outside China to ask how quickly it can get China to liberalise its currency. It is more whether it really wants this to happen extensively at all.
The problem is that 35 years of intense observation of China’s domestic economy by economists and other experts has still not helped in truly unraveling what is happening within the country. In the second decade of the 21st Century, despite having the world’s second largest economy, China still remains a mystery. There is a critical lack of information about how fiscal, commercial and the overriding political decisions are made. A world of an open Chinese currency would be a world exposed as never before to the vagaries of this information black hole. That introduces a whole raft of new risk.
We are faced now with a Chinese government that evidently has a very clear idea both of what it wants from the outside world, and, more importantly, how it can have a relationship with this world increasingly on its own terms. The message to multi nationals and others is that they are welcome to come to China, work there, invest, make money, and partner with Chinese entities – but on equable, or Chinese-favoured conditions. Chinese leaders are very aware of the attractiveness of the country’s potential, and the enticing opportunities offered by the development of its service sector. Their approach is very simple: they want people to come and work with them on the development of this economy – but in ways in which they maintain the upper hand, and where they can call the shots.
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This is fair enough. But so is a non-Chinese strategic response. China is now facing immense challenges. Growth is falling. The economy has severe structural issues. It cannot solve these easily, if at all, without foreign expertise and partnership. President Xi Jinping has not been travelling to 40 countries in the last three years for tourism. The outside world matters profoundly to this generation of Chinese leaders and their policies. For innovation, management know-how, and sophisticated markets, China will only get where it wants to with quality partnerships with non-Chinese.
In view of that, the rational response by non-Chinese companies and actors is to be as hard-nosed towards China and the opportunities there as China is being towards them. Thinking carefully about what they want from China might help – beyond altruistically helping the country develop and create a better future for its people. Dreaming up perfect scenarios for the country’s political future by outsiders has never really worked, not in the last three decades at least. The simple fact is that outsiders have to emulate their Chinese counterparts – and follow the money, seeking tangible gains.
The brutal fact is that investment returns for most companies in China in the last decades have not been great. There have been some exceptions, of course. But it has proved a hard, merciless place to really succeed in. That is not surprising. China is a hard place for most Chinese to make money in. Why should it be easier for non-locals, who have many disadvantages in terms of cultural knowledge, language, and other issues?
For the opening of the RMB to the outside world, therefore, the right approach should be that of course, this is a welcome thing, and will bring opportunities. But it is a huge thing for the world to offer China and work with it on, and to work it will need much, much better quality information from within China, more predictability, more solid rule of law, and a real mitigation of the many risks that exist at present. China always drives a hard bargain – but that sometimes backfires. The outside world needs to be hard-nosed back to get the best deal possible.
If the RMB does internationalise, it is best it happens not on China’s terms, or the outside world’s, but to the advantage of both. Otherwise, a measure as huge as this will simply not work.