Sunday, June 20, 2010

Unpegging the Yuan to the US Dollar and Then Some

http://preview.bloomberg.com/news/2010-06-19/china-signals-it-will-end-yuan-s-peg-to-dollar-citing-economic-recovery.html

The Chinese economy, in recent years, has found favor among the pockets of consumers around the world. China has been supplying the world with cheaply priced goods and in the supply-chain diagram, no one else is agreeing more than Western corporations who have found better opportunities of value creation and margin widening offered by China's super factory (i.e., it's cheap labor force + economic and socio-political stability). For profit-oriented organizations, it can be a pretty convincing decision to invest in China, especially when customer demand for their goods and services aren't regressing, while quality and capacity on the other hand are manageable and are not sacrificed (although quality control remains a huge criticism against the Chinese).

I find it disappointing though that some Americans continue to blame their government (the Obama administration) and antagonize China (the U.S.'s biggest creditor for U.S. Treasuries by the way) for their economy's decimated state. Fine, China has been pegging its currency at a fixed exchange rate to encourage U.S. buyers to buy more goods made in China, but that is only a small component of what's happening in their economy. The laws of Supply and Demand continue to ring true.

It's probably a lot messier if we try to dissect the situation and the underlying circumstances between these two superpowers. Just to thicken the plot, if the U.S. were to disapprove of China's currency practices of pegging and suddenly cut-off trade relations (where, right now China is obviously the benefactor as net exporter), would the tension between political philosophies (democracy vs communism) remain even after the end of the Cold War and the fall of the USSR? Instead of an isolated and secretive state (think North Korea), we are now seeing China enjoy the benefits of a capitalist economy, even though it remains a communist state. And of course the West is egging it on to continue its socio-political transformation. Who would want the progress that has already been achieved to regress to a polarized global political arena again? This question is significant especially when the war on terrorism has allowed the battle of "Order and Chaos" to become a battle between current civilization and stateless theological extremism (a movement that does not necessarily belong to any race, nation, state or political movements btw, only something controversially affiliated to a version of religious fervor).

Indeed, Americans really have to make-up their minds. If they believe in a stronger American economy, than they should buy American. The problem is they find more bang for the buck when they buy what the Chinese make. Allowing the Yuan to strengthen is extremely beneficial to smaller exporting nations, like the Philippines and other South East Asian nations (that's right, it's not only the U.S. that has issues with this Yuan pegging M.O.). ASEAN economies are being raped by cheap Chinese goods and services, and guess what, the stamp of approval is coming from the West and the U.S., itself, because again, cheap is cheap. ASEAN societies being "pseudo-democracies" have always had problems with inflation and labor forces. We want our cut of the pie (and some cake) as well. While China remains communist in nature, Chinese citizens have no qualms about their standards of living. It seems like they take it as it is (knowing the government is behind their back), although I may be wrong on this because I am no sociology expert on Chinese society. I must also add that it seems like the Chinese have learned how the capitalist system works,

http://ph.news.yahoo.com/afp/20100615/tbs-china-japan-auto-labour-honda-ec2362a.html

and that egalitarianism has started to fade as citizens ask for better pay packages and benefits even though we all know that outside a certain company (say, Honda) other employees earn less.

Interestingly enough, it has occurred to me (as I was watching a History Channel segment, "Iran: The Hundred Year War") http://www.historyasia.com/synopsis.aspx?libId=1132&sId=628&sTime=1260"

that because of the Cold War and the fear of a Marxist contagion taking over the globe, the bastion of Democracy that is the United States, sought to take preventive measures and/or place neutralizing factions by putting local leaders into power and providing support. These people were supposed to be committed to upholding democracy as what the forefathers of the United States had intended when they emancipated themselves from British rule. Unfortunately, the noble premises and intentions did not translate no matter how educated these people supposedly were and most of them turned out to become despots and dictators.

The very people that were put into place by the democratic superpowers as champions of democracy against communism became the templates of dictatorship that citizens of third world nations learned to despise. Ironically, this was what the U.S. wanted to prevent, Stalin-like leaders who hoarded power. Then again, such is the unavoidable problem in creating an authentic democracy. Oppositions will exist and they will manifest through what Constitutions provide for as freedom of speech, expression, demonstration and whatnot. I believe that up until today, among third world nations (like in ASEAN), leaders (prime ministers, presidents, dictators or what have you) and their "entourage" have often been tempted to take a cut of the pie and enrich themselves while in power, while the opposition keeps a look out and would cry foul whenever something is amiss or is being plundered. This cycle has gone on ever since. The U.S. remains committed to poise itself as the best and viable template of democracy, however, where people have the right to say what they think, as long as these are legal and do not step on other people's rights. Unfortunately, this very system is where "in-house" terrorists and extremists thrive, because they can make it look as if they are simply expressing their opinions and beliefs when in fact they are plotting for the destruction of the existing systems/structures of order and governance.

When the smoke had cleared after the Cold War, China, meanwhile, remained intact and stable. The communist state that was once a concern for democracies everywhere had found potential in free markets. Deng Xiaoping was one of the advocates of China's transition (http://en.wikipedia.org/wiki/Deng_Xiaoping") and apparently the transformation had started not from the ground up, but from the top down, from the leadership down to general society.

While China had initiated changes from the top, other dictatorship-ruled third world nations found a re-calibrated version of democracy only after revolting against their once pro-democracy leaders (who were also once supported by the West). This meant that the change was from the bottom-up. With the top spot left open for everyone to take a shot at (a position at the top is indeed tempting) and the democratic mode of empowerment (elections) serving as the mechanism, citizens of third world democracies have found themselves where they are today. Ironically, feeling lost and clueless as to the ultimate direction of their politics, society and economy.

And so, after getting sidetracked, we move back to the main subject of our discussion. The United States must figure out ways to sell their first-world goods/services at cheaper prices that citizens of poorer countries can afford. It can't expect itself to become a net exporter overnight. The third world has long been preconditioned to think that it works and supplies goods/services for the U.S. economy when in fact it can work both ways. Roles should and might eventually get reversed in time, wherein the Chinese (being wealthy with their appreciated currency) become net importers/consumers, while Americans learn to buy their own goods and become net exporters/suppliers to some other country. This observation, of course, simply comes from a by-stander from a small South East Asian country, which will probably remain (together with its ASEAN counterparts) as suppliers for both China, the U.S. and the rest of the world. It may probably even be for the best.


All compositions, statements and opinions of the author are copyright © Earl T. Malvar 2009-2010. All rights reserved. There is no honor, respect, admiration, intellectual and academic dignity garnered through plagiarism.

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