Hitting the brakes – the WTO column

(Later also at Chinabiz)
It was very good the CNN anchorman did not hear my laughter when he asked his colleague in Beijing the other day whether the revaluation of the Renminbi was a face-saving operation on the side of the Chinese government. When one government would have saved its face, be it in a very minimal way, then it was the US government who has been sending government official over on a monthly basis for the past decade to plead for a floating currency in China.

Only domestic reasons have triggered off the change in how China’s financial authorities manage the Renminbi and the change this week is directly related to the failure to stem China’s break pace economic growth. The 9.5 percent economic growth for the first half of 2005 is a serious reason for concern. Sustainable growth seems impossible and China’s destabilization of global markets costs dearly. A fast economic growth has also another long-term disadvantage. Keeping its citizens happy with economic growth is only possible as long as growth is possible. The end of those possibilities comes earlier in sight when that growth is as high as it is now. In that way slowing down the economy also makes politically sense.

Trying to slow down real estate seems to have failed, although the effects of the most recent tax measures still have to be seen. But since local governments have a profound interest in maintaining especially growth of its real estate, the central government might find itself in a difficult position when it really wants to halt growth in that industry.
Making China more expensive for the rest of the world makes therefore makes economically much sense and offers a more sensible explanation than any face-saving operation in international relations. More substantial strengthening of the Renminbi seems logic.
There are more indications that show the central authorities are killing more holy cows that have survived since the new government got into place.

At first sight this little article in the China Daily on the growing pressure on the labor market in the northeastern city of Harbin seems hardly worthwhile mentioning. It describes how supply and demand at the local market grow apart. A migrant worker, used as an example, is looking for a 600 Renminbi per month job in a restaurant, but cannot get more than 400 and decides not to take it, also because those meager salaries are often not paid at all.

First, the shortage of millions of migrant workers that started to emerge early last year in the southern provinces Guangdong and Fujian is not only continuing into 2005, but even expanding to other regions. Last year it was the unthinkable happening in China: factories could not get enough workers to push their teddy bears and other goodies for export out.
Most quoted reason was that because of changes in government policies that were beneficial for the country side, like scrapping the agricultural taxes. For migrant workers staying at home was bringing them as much money as going down to China’s low-end production belt.

What is more important in the article about Harbin is that is actually seems to suggest a change in how the government is dealing with pressures on the labor market. Up to not so long ago local governments were under orders to do anything to prevent wages from going up, a policy that was executed in a rather successful way in the past decade. Preventing China from becoming more expensive has been standing policy over much of the last decade. Those days seem to be over. Together with the revaluation of the Renminbi, allowing wages to rise constitutes a profound change in standing policies.

Fons Tuinstra