In China, U.S. money losing favored status

THE BALTIMORE SUN

BEIJING - The first time Ding Linfeng was ever given U.S. dollars, in 1992, he never actually put the currency in his wallet. The money came as a $100 check from an American company, and he took the check straight to the Bank of China, where he kept the money safe - in dollars, not the Chinese renminbi, or "RMB."

"We didn't see RMB at that time as a real currency," Ding recalled, relaxing with a cup of coffee in a central Beijing Starbucks. For most Chinese, the U.S. dollar was "like gold," Ding said. "Even if they had quite small amounts of U.S. dollars, they would keep it, never touch it, because it was real. Real money."

That kind of thinking is becoming the stuff of nostalgia here, where a booming economy has sharply lifted the purchasing power of the Chinese people, especially in the cities. China's RMB not only seems to be "real money," but some Chinese urban professionals, such as Ding, are suddenly changing their long-held U.S. dollars into RMB,

The RMB is counted in yuan and has been issued by the People's Bank of China since 1948. It is predominantly a paper-bill currency, with notes worth as little as one Chinese cent to the largest, 100-yuan bill, a red note graced by the face of the republic's founder, Mao Tse-tung. (A politically safe choice, Mao's sober portrait is also on the 50, the 20, the 10 and the newest of the 5-yuan notes.)

Dumping the greenbacks of Washington and Franklin for the red hues of Mao has nothing to do with patriotism but everything to do with the quirkiness of currency economics and with the robust economy that Mao's capitalist successors helped build.

Many economists expect that Beijing will allow the yuan, now fixed at a value of about 12 U.S. cents, to increase slightly in value - perhaps by 5 percent - this year and possibly by as much as 20 percent later.

That means, naturally, that the U.S. dollar would be worth less here, having already declined in value in much of the rest of the world. To Chinese professionals, their precious U.S. dollars are not looking quite as precious anymore.

"We have to do something to deal with this situation," said Ding, an engineer in Beijing for the Boeing Co. "We are not willing to see our deposits shrink."

Ding and his wife, who also works for an American company, decided this week to do something: They plan to exchange up to two-thirds of their U.S. dollar savings - or $20,000 - into RMB.

Some of their friends, including an employee at the Bank of China, are doing the same, in some cases trading all their dollars for Chinese currency.

These decisions are directly a result of currency speculation, not of an underlying faith in the Chinese economy. Seeing a chance to make an easy 5 percent or more on their cash savings - or to avoid a loss in value in U.S. dollar savings - urban Chinese professionals are making an investment decision.

But the march to the RMB is also symbolic of China's coming of age as an economic force. Much like other once-developing countries before it, including Japan and South Korea, China is facing pressure to increase the value of its currency because its economy is red-hot, growing at a rate of 8 percent to 9 percent a year.

China's economic competitors, led by the United States, argue that by keeping the yuan low in value, China prices its exports artificially low, giving it an unfair trade advantage. Some economists view that argument as largely a political effort to blame China for lost jobs, especially in an American presidential election year.

But economists here warn of a real domestic danger to keeping the yuan's value low. Huge sums in foreign investment are flowing into China, fueling such an increase in spending, real estate development and business expansion that the economy could melt down in a mess of inflation, empty office buildings and bad loans.

Increasing the value of the RMB would help the economy cool, in part by making China more costly for foreign investors.

Talk about the power of the once-humble RMB mirrors a growing confidence here that the Chinese economy is becoming the center of the world.

"We are seeing a gradual shift in the world economy to this area," said He Fan, an expert on international finance at the Chinese Academy of Social Sciences in Beijing. Some economists predict that in 2050, "China will be the No. 1, the largest economy in the world" - as a result of both economic growth and an increase in the value of RMB.

The rationales for holding U.S. dollars - the long-term security of the dollar, the lure of investment and spending opportunities abroad, the potential for unrest in China - have faded. Educated, ambitious Chinese see better business and investment opportunities here than abroad, and the domestic market is expanding to satisfy the consumer hunger for cell phones, computers and cars.

Still, for Ding, the decision to change some of his dollars savings into RMB has been difficult. He long avoided using his American currency savings, which he views as his nest egg for retirement, unexpected crises and his 6-year-old son's college education. Twice, when buying apartments, he chose to take out loans in RMB, rather than tap his U.S. dollars.

His caution was learned from witnessing China's radical, and still incomplete, economic transformation. Growing up in an era when the better-off and the well-educated were reviled and persecuted, when private businesses were illegal, Ding, 39, saw the economy evolve unsteadily during the 1980s, the opening years of China's market reforms.

The exchange rate changed frequently, and, as is customary in developing countries, there were two rates, the official one and the street value on the black market, where most Chinese bought their U.S. dollars.

In 1987, when Ding was a university student, the official rate was 3.7 yuan to the dollar, but the black market rate was 10 yuan to the dollar. Five years later, when he received his first check in dollars, he had no idea what to do with a check written in his name. He took it to the Bank of China, which held on to it for three months before giving him a deposit slip. Each time he came in with another check in dollars, the bank gave him a new deposit sheet with a different account number, until he had amassed "30 to 40" accounts.

Since then, the government has gradually lowered the official exchange rate of its currency, foreign investment has poured in and the economy has taken off. Today the black market price is not much different from the official rate of 8.28 yuan to the dollar, and the dollar is not as hard to come by: Chinese households now have an estimated $100 billion in savings in U.S. currency.

Ding has consolidated his deposits, and the days when the dollar seemed "like gold" feel a bit distant. But his confidence in the RMB goes only so far.

He expects that the Chinese economy will remain strong for at least "five or six years," as migrant workers continue to provide the cheap labor that has helped make China the world's leading factory.

But he worries about the long-term problems China faces, including the failing state-owned enterprises, the millions of laid-off workers and the hundreds of millions of Chinese struggling for meager existences in the countryside.

"The U.S. is the world's largest economy, and it has been and will be the most stable market, in terms of its legal system, management system, government system," Ding said. "I cannot guarantee that the future of China will be so stable in 10 years', 20 years' time."

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