It would be a total disaster for ethnic Chinese in SE Asia if the PRC pushed the Spratlies issue, which fortunately, it really isn’t doing.

China’s best course of action is to “agree to disagree” about the Spratlies and talk about joint exploration of oil.

That’s also precisely why the PRC *won’t* try to turn southeast Asia into a regional bloc, and why SE Asia won’t let it. Any effort by the PRC to assert power over southeast Asia will meet with a very nasty backlash from non-Chinese in SE Asia, and that won’t be good for the PRC, and it won’t be good for ethnic Chinese in SE Asia.

There was a SE Asian foreign minister (I think from Indonesia), who said that it would be awful if *either* China or the United States dominated SE Asia or if there were a huge conflict between the two over Taiwan. The best scenario for them would be if the US and China balanced either other in a friendly way, allowing SE Asia to play each against the other.

The friendliness between Singapore and China can been seen in this light. Singapore is also strengthening military cooperation with the United States at the same time it is strengthening military cooperation with China.

DC: Twenty percent of Malaysia’s population is ethnic Chinese. Seventy percent of Singapore’s population is Chinese.

And 80% of Malaysia isn’t ethnic Chinese, and 30% of Singapore isn’t ethnic Chinese. One thing that China has to be very careful about doing is to behave in a way that doesn’t destabilize ethnic relations within SE Asia. Traditionally, the PRC has been very good about this.

Trying to juggle national identities is something I have to worry about in a daily basis, and this is one reason I find working in multi-national corporations to be relaxing, because that’s one place where I don’t have to worry too much about the “loyalty” issue.

The curious thing is that I’ve tended to find more Chinese ultra-nationalists on the internet among Malaysian Chinese than Chinese Chinese, but reading Malaysian history makes this understandable. What I don’t think that there is an appreciation of is the difficulties (along with the benefits) that China as a rising superpower puts on overseas Chinese.

The one reason I’m interested in finance is that if the US economy collapses as China rises, this will get really bad for me. Really, really, really bad.

Guest: But he notes that the slow reval camp is changing direction, as seen in 2007 Q4 Monetary Policy Execution Report: “本币升值有利于抑制国内通货膨胀” = “local currency appreciation will help suppress domestic inflation”

Yup. That’s my sense of the direction of the debate too. Also there is a lot of good stuff on the web, and I’d wish some major newspaper would learn the value of “hypertext” and post links to original primary documents like the PBC monetary reports.

http://liushan.blog.sohu.com/71608650.html

I don’t have time to translate the above word for word, and more importantly, don’t know if this is representative or not. But this blogger (vice editor of the China Business Times newspaper, Econ PhD) names the academics in the camps for slow reval and fast reval [as twofish pointed out, the debate may circle around this], points out the the slow reval camp tends to be more well known in domestic circles and the fast reval camp tend to be associated with international econ circles (e.g. the head of CASS Econ Institute Xu Yong), and that the slow reval camp has thus far won in policy. But he notes that the slow reval camp is changing direction, as seen in 2007 Q4 Monetary Policy Execution Report: “本币升值有利于抑制国内通货膨胀” = “local currency appreciation will help suppress domestic inflation”

Blogger, who is in the fast reval camp, also notes:

“在美元持续贬值bianzhi而人民币对美元汇率相对稳定的条件下，进口产品价格的持续上涨，必然导致国际上的通货膨胀传导到国内，从而提高生产成本，刺激国内物价的上涨。”

“In the case of dollar depreciation and a relatively stable USDCNY rate, prices for imported products continually appreciate, necessarily leading to importation of international inflation. This leads to increasing production costs and stimulates prices of domestic goods.”

Also, just watched diyi caijing [China Business News] on TV. The two economists interviewed are looking for faster (”>10%, maybe even 15%”) RMB appreciation this year. They mentioned inflation will be the force that drives (the gov’t ?) to do that (”makes imported prices cheaper”) and discussed how this would help with the domestic price of oil.

So maybe people here are slowly realizing what this peg is doing to them (its not something you typically read about in the “China Daily”)

“…Chinese companies routinely shortchange their employees on wages, withhold health benefits and expose their workers to dangerous machinery and harmful chemicals…”
http://www.nytimes.com/2008/01/05/business/worldbusiness/05sweatshop.html

The yuan will form the basis of regional bloc that will include Southeast Asia, but it won’t become the world’s reserve currency. The economic costs of becoming a global superpower is far too great for China, and would be resented around the world. Cultural and Ethnic ties bind China to Southeast Asia with a large Chinese disporia population. For instance, my father in-law born in Malaysia now lives in Guangzhou. Twenty percent of Malaysia’s population is ethnic Chinese. Seventy percent of Singapore’s population is Chinese. Already the Chinese yuan is almost as accepted as the US Dollar in Thailand, Malaysia, or Cambodia. Gradually the Chinese yuan is moving to more convertability in trade transactions across Asia.

With the recent Singapore-China defense agreement, Southeast Asia is rapidly integrating into the Chinese sphere of influence while the US will remain distracted by Middle East events for decades to come. With the notable exception of Aircraft carriers, the China PLA Navy is now larger in Western Pacific than the US Navy with 60 Destroyers and Frigates, 50 Attack Submarines, 45 Corvette patrol ships, 40 Amphibious Assault transports. A new unsinkable Naval Airbase has been constructed in the Spratly Islands in Southeast Asia.

Really, really doubtful. No one serious in China thinks that this is going to happen. Besides, why should Chinese companies “push out” American ones.

Guest: The market cap, for example, of China Petroleum and Chemical is more than that of the three largest US chemical companies

Which shows you how big the Shanghai stock market bubble really is. The *exact same thing* happened with Japanese banks in the late-1980’s, with Taiwanese companies in the early-1990’s, and with US dot-coms in the early 2000’s. When you have a stock market bubble, it massively inflates the price of the companies.

One thing that China has learned from Japan late-1980 is not to believe the propaganda. One reason Japan had problems in the 1990’s is that the Japanese policy makers then actually believed a lot of the “Japan will rule the world/the US is in decline” nonsense of the 1980’s. Chinese policy makers have a very clear eyed view about how powerful the US really is and how weak China is. One reason for this is that you have huge numbers of Chinese policy makers who have spend extensive time in the United States, which isn’t true with Japan-1980 or Soviet Union-1960.

Also wikipedia is a really good source of information since you have people posting there with lots of deep expertise in some areas.

I don’t think that policy in China is unfathomable or opaque. Once you know who the players are, how they see the world, and what they want, it’s pretty obvious what is happening and why.

Start out by learning what the major agencies are and how things got to be the way that they are. Also do a “day in the life of a Chinese bureaucrat.” Take some random people, look at their educational background and formation experiences, and try to figure out what a day in their life looks like.

I agree that China should buy equities, which I would argue are more appropriate investments for a sovereign wealth fund than bonds anyway…..if the US will let them of course. Buying equities would protect the Chinese against inflationary debt repudiation by the US, which, when you read what Bernanke has said, must be a strong possibility in the near future.

mheck82 on 2008-01-08 07:29:34

Thanks for raising some differences. You make a good point about the US being a safe haven during the Second World War and Cold War. However, the UK was on the gold standard for very little of the 1914-2006 period. Convertibility was suspended during the First World War, resumed in 1925, and abandoned permanently in 1931. You could argue that sterling was tied to gold as part of Bretton Woods, but as the occasional devalations showed, the UK reneged whenever the going got tough. I certainly disagree when you say that the renminbi will not become the world’s reserve currency. China’s economy will soon be much larger than the US, if only because there are a lot of Chinese. I think it would be unprecedented for the currency of the largest economy not to be widely used as at least one of the reserve currencies – as even sterling remains to this day.