The Institutional Risk Analyst: China: Beware What You Wish For

The latest generation of Washington policy wonks and investment bankers have discovered the world's oldest emerging market and have dutifully prescribed a currency float, this to adjust China's massively one-sided trade balance with the rest of the world. Our China correspondent comments on this and other topics below in the first of a series of on-the-scene reports .

Everyone has it wrong. If China's leaders relax currency controls the slightest bit, every Chinaman is going to dump the Renminbi for anything else that they can get. Gold, dollars, Yen, Euros, Francs, Pounds, chickens, you name it. Enforced stability is all that people here understand.

In fact, the biggest concern for foreign players in the China market today is liquidity. How would banks handle a 80%+ overnight cash redemption rate, especially when there are few players in the market other than the state banks? The entire Chinese bond market only has 37 corporate issues and 32 convertibles.

If its financial situation is fragile, China's taste in clothing is a national tragedy. The entire population of China is both tone deaf and color blind. Nothing else could explain the volume at which Chinese must be spoken and the hideous taste in clothes that is still on display. Material well-being has, on the surface, improved over the past decade, but much of what foreigners see is a garish veneer, the image of how China thinks it should look in 2005.

The Hollywood back lot quality of modern China is apparent the second you arrive -- if you look for it. Dozens of brand new automatic teller machines grace the airport concourses, but nearly three-quarters of them do not work; hundreds of recently planted uniform trees line the highway into town, offering a "green" image, but only slightly masking the gritty, dirty reality of a population cooking over lumps of coal and living in a sea of pollution just beyond view. While modern glass buildings grace the main thoroughfares, they fail to hide the crammed, dreadful and repulsive living quarters in which the majority of the population continues to dwell.

Try as the government may to project an image of progress and modernity, cracks are apparent (for those who venture from the two immediate blocks surrounding their hotel or the various tourist attractions). Groups of homeless people, cripples and beggars, which were never before allowed to be visible, are ever present; prostitution, which was unthinkable a few years ago, is now common; and, God forbid, if Chinese history repeats itself, drugs and gangs will be the next scourge to reassert themselves, as idleness is the devil's plaything.

From the late Qing Dynasty (~1850's) up until the introduction of Communism in the 1920's, several Chinese scholars pursued KaoCheng scholarship. The premise was that China's salvation from the problems it faced - backwardness, subjection to foreign imperialism and social unrest - could be found in the original classics of Mencius and Confucius, if only the unsullied "truth" could be unearthed from the centuries of detritus layered on them by innumerable scholars "interpretations."

What they called for then was a reification of names - that things should mean and express what they were supposed to. A similar undertaking is warranted today.

Just look at the newspapers, where Western media moguls proudly expound on their plans for 'their' magazines and television channels. But like the banks, the notion of private property is a convenient fiction. Who's magazine is it, who's television channel is it when the articles and shows are sanitized to placate China's political censors?

Or consider Communist Party's promulgation that they will pursue stricter enforcement of intellectual property laws. This, when regular property has no rights whatsoever. Orwell's vision perfected - two legs are good, four legs are bad.

The interesting questions are of course: "Who is in control?" and: "How is control maintained?" China has the benefit (dare we say curse?) of enjoying a virtual zero cost for labor, as there is almost always another person waiting to do the job for less. This in turn provides those who control the economy many benefits, but if and only if these elites in fact maintain control.

But who are we to complain? Dinner out with beverages at a local restaurant costs less than a dollar; ditto for the tailoring of some travel worn clothes. As long as the Communist Party and their clients in the West maintain control, everything will be just great.