The Word from China

XIANGHE, China — U.S. Treasury Secretary John Snow struck a surprisingly conciliatory tone after talks with China’s top economic leaders, saying he has faith that the Chinese will reform their financial system. Mr. Snow said he came away from the weekend meetings convinced that China is clearly “preparing the way” for a more modern financial system and a more flexible exchange rate for its currency, something Washington has pressed for. “It’s real. It’s happening,” Mr. Snow said. He added that he was “heartened” by the many changes Beijing was putting in place.—Wall Street Journal Like he has a choice!

U.S. commercial interests and the Chinese economy are so intertwined it’s hard to figure what kind of leverage Mr. Snow has pressing China for anything more than extra duck sauce on his Kung Pao Chicken at the state dinner.

A friend who runs a small consumer products business just returned from two weeks in that country, touring the plants where almost 100% of his company’s products are made and also visiting the buyers for the U.S. retailers which sell almost 100% of those products.

He thinks the Yuan will be allowed to appreciate over time, eventually, but what worries him more is making sure he’s getting the right products made and shipped in time for the Christmas selling season…and lining up next year’s production.

And any notion that the Chinese somehow might knuckle-under to threats from Secretary Snow and change the way they conduct their economic ‘long march’ to prosperity is not part of that equation.

As for the changes he has witnessed over a decade of trips to China, the most profound is the immense wealth creation accruing to the men who bought the state-owned businesses that now churn out his product, how the plants have grown in size and modernized their production techniques, and the trickle-down impact of all this on the workers themselves:

“Five years ago I’d walk through the plant with the owner, and the women cowered at their machines. Now they seem happy. I can’t explain it.”

I can: it’s called money.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.