Currency Re-valuation and High Speed Trains

One of my favorite “magazine” bloggers, Andrew Leonard at Salon: How the World Works wrote a post titled “Fiddling with China’s yuan while the U.S. burns:
Look what happened while America whined about currency manipulation: An amazing high-speed railroad network“. Andrew makes the point that the valuation issue is one of “yesterday’s battles” and will not materially help labor and unemployment issues in the United States. But while we focus on this, [IMHO bogus] issue, China has invested where it counts:

I’m not saying China’s currency manipulation isn’t a factor in global trade and current account imbalances — it most certainly is. But if instead of running up huge budget deficits because we didn’t make arrangements to pay for our wars and prescription drug benefits and tax cuts and stimulus programs and bailouts, we had been watching our Wall Street money men a little more closely while simultaneously pouring government investment into education and technological research and development and public transportation infrastructure, we might have ended up feeling a little less vulnerable now to the steps taken by other countries in pursuit of their own mercantilist interests.

Andrew is completely right. Completely. Its obvious. Its so obvious I just want to cry.

Rich Brubaker, at All Roads Lead to China, wrote his view on the impact of this:

Government:
1) US Secretary Geithner and Vice Premier Wang Qishan – Win. Team work prevailed
2) Obama – win. RMB revaluation hailed globally (unless.. well.. the final figure is 1%)
3) Hu – Even. This is not a deal that would not be done unless it benefits the masses in China, but a bit of face may be lost

Investors:
1) Overseas Investors in China – Win, with a catch. Money moved into China grows, but still going to be a pain to get it out.
2) Local Investors holding overseas assets – Lose later.
3) Local investors looking to go overseas – Win. Assets just got cheaper

Corporation
1) Exporters from US looking to import to China – Win. Their products just got cheaper, and that makes them more competitive locally
2) Exporters from China looking to import to US – Lose. Their products just got more expensive
3) Chinese manufacturers looking to move up the value chain – Win. Acquiring technology just got a lot cheaper

Consumers:
1) Chinese – win. Money goes a lot further now. Wealth transfer can begin. Retailers are sure to offer RMB revaluation discounts.
2) US consumer – lose. Stuff at Wal-Mart costs more.
3) US labor – little impact. Jobs are not going to return to US, but increased cost will raise the bar on further loses to China (loses may move to other places)

I disagree with Rich on one point. I’m 99% sure the revaluation will be minor and slow…like 1% growing to 5% over the next 18 months – slow. This is more or less what Andrew predicts. Its the same pattern as before. The Chinese leadership are making this seem like its a big “gift” to the West, then they will implement very gradual change. I guess that’s the right way to do it. Not that I would know…I’m not an economist. But if the change is 1% – 5%, the effect of the revaluation will have little impact on consumers, or labor / industrial structure.

Andrew likes to link different trends together in his posts. He points out that while the focus is on the currency valuation problem, people are not noticing the proposed investment from China in high-speed rail in California¹, signifying China exporting its own “green-tech” transportation technology to the US. As I said, Andrew is completely right about everything. (BTW, Rich Brubaker made a post about this same topic a month ago) But I am not convinced that China is going to be able to bring “Chinese high-speed rail” technology to the US. Why? Among other reasons, I believe that there are companies out there which will debate the “Chinese-ness” of the technology.

The D-Train (动车)

The NYT article states:

State-owned Chinese equipment manufacturers initially licensed many of their designs over the last decade from Japan, Germany and France. While Chinese companies have gone on to make many changes and innovations, Japanese executives in particular have grumbled that Chinese technology resembles theirs, raising the possibility of legal challenges if any patents have been violated.

Expanding on this, much of the technology for China’s high-speed rail comes from Japan and Germany. In appearance, the current higher-speed trains (the D – train 动车）are exactly like the Shinkansen of Japan. That’s because technology was transfered from Japan; the Chinese train is based on a modified JR East E2-1000 series train. Likewise, many component technologies were transfered from Europe, from companies like Alstrom and Siemens. These companies have already started to complain about China exporting rail technologies. But to my knowledge, none have taken legal action in China. None have taken legal action through WTO on this issue either. That’s probably because to do anything other than complain would risk relations with their Chinese SOE customer. However, if California becomes an attractive market, they could easily throw a monkey-wrench into any bid from Chinese companies to supply technology.

China is a growth market for infrastructure. But if MMCs can get a bigger percentage in an American market… a market where quality and performance will be valued more… a market where their IP will have legal protection…they probably will be willing to alienate the Chinese customer in favor of the US customer. Unless… they form up alliances / consortiums with Chinese suppliers and financiers. Many ways how this can play out. Of course, talk about bringing in technology from China is based upon the idea that Americans decide that clean public transport is important. Which means that United States must actually focuses on its infrastructure, technology, and education development, instead of all the stupid non-issues that absorb media attention.