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Part 1- China's Economic Success: A Playbook For Strong Currency & Real Power
Growth has slowed sharply with the main engine of growth – Real Estate slowing down - but the Yuan-USD peg has stayed on course, thereby preserving Yuan’s strength!
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RBI (Reserve Bank of India) has come out with a mechanism for settling international trade in Indian currency INR (Indian National Rupee), with the participation of increasingly more countries (48 at last count), which is a significant step toward internationalizing the rupee in the long run
Atal Bihari Vajpayee was the first Prime Minister in India’s recent history to state publicly that the value of India’s currency – The INR, should be strong vis-s-vis other currencies, and especially the USD (US Dollar). India’s current Prime Minister, Narendra Modi, rides on a massive mandate, and in the past has been on record to state the same – that the value of INR should be strong vs the USD! But till date, India has only held on to the exchange rate in intervals since Modi’s been in power, rather INR has recently weakened in step with interest rate hikes by the Fed (Federal Reserve) leading to money returning to “Safe haven” US! At approx. 83 to a USD, the currency is long way away from it since it used to trade in 40’s in Vajpayee’s time. A series of fiscal profligacies and economic mismanagement around post-Lehman crisis years – approx 2010 by then Finance Ministers, led to the INR slipping down to below 70 and has slipped even lower since then!
Strong Currency = Real power
The recent removal of UK’s Prime Minister Liz Truss within a matter of 45 days as the shortest duration PM ever in history of the UK serves as a veritable reminder as to the criticality of not letting your currency become weak! China has shown a way by consistent record trade surpluses, record FDI (Foreign Direct Investment), good capital creation & investment in infrastructure and hence held the exchange rate of RMB to USD in a narrow band since many years!
India is poised to grow from a USD 3.5 trillion GDP to more than USD 10 trillion in the coming decade. Can a country gain strength without looking after the variable of a strong currency?
India’s currency – INR - is highly prone to shocks like increases in Oil price – the currency slips easily. But to be in the league of developed economies, a country must have a strong currency.
A nation economy – its Trade balances, Inflation, GDP growth, its size and strength (as validated by international ratings), its Fiscal and Monetary policies – if managed well, should lead to a strong currency, in normal parlance. But what is often overlooked is that the reverse is true as well - a strong currency makes a strong nation! Policies like zero tax on FDI and forceful actions like getting a country’s bonds included in international indexes provide capital flows in the country, which adds to the capital creation, enhance savings by citizens, increases its investment capacity, aids GDP and leads to a stronger currency. This strong currency, in turn, becomes a tool to suck global resources which massively aids consumption – the reader can imagine what it would mean for an economy like India whose GDP primarily consists of consumption.
A strong currency makes it easy to get the latest technology, costly capital equipment, and high-level infrastructure – all of which are tools of a developed country.
The China playbook in creating a strong economy with a stable currency
China pegged its currency Yuan to USD and successfully managed to keep the peg intact all the while growing its economy to become the 2nd largest economy on the planet. This was made possible because of record trade surpluses which allowed it to attract foreign currency inflows. Real economy dynamics went hand in hand with Financial economy! But the Chinese Government subsidises its companies which should have meant that at the time of entry of China to WTO (World Trade Organisation), it should not have been given the “Market Economy” status. This allowed it to keep its Exports cheap inspite of a strong currency! The playbook for dominance in foreign markets is to flood these markets with cheap Chinese products, destroy the local companies and then raise prices to earn handsomely, once the monopolies are created by Chinese companies!
China, also works on “Socialism with Chinese characteristics” – most of the times which means a cohabitation of Government with Private companies like an instance in this article – NASDAQ-listed Nio Inc, a rival of Tesla and its unique symbiotic relationship with Chinese
In the case of Yuan’s peg to USD, China managed the “Impossible trinity” – which states that it is impossible to have all three of the following at the same time:
- a fixed foreign exchange rate
- free capital movement (absence of capital controls)
- an independent monetary policy
The Chinese kept inflation under control and ran an expansionary monetary policy at the same time by deftly increasing capital spends in creating long-term infrastructure, crucial for exports and for graduating to a developed economy! 3 Productivity rose sharply and inflation didn’t – Millions of Chinese started participating in the Business of goods and services – the Yuan-USD peg increased exports – all this income accrued to its people and its income increased! – China went from USD 200/- per capita income Country in 1970’s to now more than USD 13,000/-; but all that reflected majorly in savings which were channelized to create infrastructure!
Chinese needed to produce more and sell more – and that’s exactly what they did – yet domestic consumption was low. Once their Labour costs rose more than 10 times, exports became costly and started taking a hit – and excess capital started creating ghost infrastructure projects
Hence, primarily China became rich through exports. President Trump felt that the wealth of US was going to China – And China realised it was no longer possible to get GDP growth through Exports – that’s when China started a tilt towards increasing the Consumption of its population
Another way of keeping exports robust was to graduate to cutting-edge, high-tech exports, AI (Artificial Intelligence)/ ML (Machine Learning) which gave price advantages. Simultaneously, the Chinese manufacturers were pragmatic and shifted their production to low-wage countries like Vietnam, Bangladesh and now - India China also created their own Tech monopolies like Baidu, Tencent, Alibaba, Meituan – instead of ceding their crucial sectors to US Tech companies – the FAANG’s (Facebook, Amazon, Apple, Netflix, Google). With a boom in consumption of the Chinese people and the creation of huge Consumer Tech companies, retail lending took off – Alibaba’s Financial Services firms were telling people to consume more!
The current President of China – Xi Jinping – has taken steps to curb this Debt-fuelled borrowing & consumption binge – He said the Chinese dont have to borrow from future and future consumption – and hence he clamped down selectively on Consumer Tech, leaving other companies like Huawei untouched! He also clamped down on hyper-capitalist tendencies, limiting Gaming time of students and curbed malpractices of outside-School EdTech companies
All this while, growth has slowed sharply with the main engine of growth – Real Estate slowing down - but the Yuan-USD peg has stayed on course, thereby preserving Yuan’s strength!
Tushar Kansal is the Founder and CEO of Kansaltancy Ventures, a multiple-awarded Investment Management firm focused on providing Funding from its network of 750 Global Investors.
Reach him at [email protected]
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.