Posted on 09/18/2003 9:56:59 AM PDT by NativeNewYorker
Sept. 19 (Bloomberg) -- When Goldman Sachs Group Inc. chief China strategist Fred Hu predicted during the 1997 Asian financial crisis that China would retain its three-year currency peg against the U.S. dollar, he contradicted Asia's leading traders and economists. He was right: The peg stayed.
Now Hu, formerly a paid-up member of China's Communist Party, expects the world's sixth-biggest trading nation to let the yuan appreciate as early as this year. China has fixed the currency at about 8.3 to the dollar since 1995,
``China's business cycle is different from the U.S., so there's no reason why the dollar peg should stay,'' said Hu, 40, a Goldman Asia managing director, in an interview.
Across the globe, bankers, businesspeople and politicians are pressuring China to keep a lid on exports by letting the yuan trade more freely, a step that probably will increase its value. U.S. trade groups, representing manufacturers such as General Electric Co., Nucor Corp. and the now-bankrupt Pillowtex Corp., say cheap Chinese-made goods are forcing them to shut factories and cut jobs.
U.S. Treasury Secretary John Snow made the yuan a priority subject when he met China's leaders Sept. 2 during his first official visit to Asia. Also on Snow's agenda: breakfast in Beijing with U.S. business representatives, including Hu.
``Fred Hu is the quintessential insider'' on China's economy, says Wei S. Yen, who tracks Chinese banks for Moody's Investors Service in Hong Kong. Analysts such as Yen say no other economist combines access to China's business and political leaders with an executive position at a Wall Street bank.
Some Flexibility
China is loath to budge on the yuan. Economists such as Morgan Stanley Asia Ltd.'s Andy Xie and J.P. Morgan Chase & Co.'s Joan Zheng say the country needs the jobs created by exports to compensate for the closure of state-owned industries during the transition from communism to a market economy.
Moreover, while Chinese exports increased 34 percent in the first half of this year, imports grew 45 percent, government figures show. China says a stable yuan benefits China and its trading partners.
That hasn't stopped investors betting China will allow the currency some flexibility soon. Goldman first predicted in June that the country might let the yuan trade at 2.5 percent above or below its current level within six months.
By Sept. 16 in Hong Kong, contracts that gauge investors' estimates of the yuan's value reached a record 2,075, implying that investors expect the currency will rise to 8.0695 to the dollar in a year if not fixed.
`Connected'
Zhou Yuzheng, manager of Nanxing Electrical Co. in Kunshan, near Shanghai, is trading forward contracts with an eye on the 27 million yuan ($3.3 million) he needs each month for payrolls and overhead. ``If someone as connected as Fred Hu says the yuan will rise, that means it will probably happen,'' the Taiwan businessman says.
That's encouraging news for U.S. manufacturers. In July the Coalition for a Sound Dollar, which comprises more than 80 U.S. trade groups, began preparing a trade complaint against China's currency policy in a bid to get the Bush administration to make China bend.
The coalition plans to tell the U.S. Trade Representative's Office that China is violating both World Trade Organization and IMF rules by keeping its currency artificially low.
The move comes too late for bankrupt Pillowtex. Even as U.S. textile companies pressure the government to levy tariffs on Chinese clothing imports, Pillowtex closed 16 plants and sacked 6,450 workers in July, the largest firing in U.S. textile history.
Mao Zedong's Birthplace
Hu, a native of Hunan province, the birthplace of China's first Communist-era leader, Mao Zedong, left China as an engineering undergraduate in the 1980s to study economics at Harvard University. His teacher: former U.S. Treasury Secretary Lawrence Summers, now president of the institution.
After working as a consultant to the World Bank and as a senior economist with the IMF, Hu moved to Hong Kong for Goldman in 1996.
One of the lessons Hu says he learned from Summers is that currencies should be freely traded.
``I strongly believe that the exchange rate should be left to the markets, not fixed by government policy,'' he says. ``China is now a part of the world economic community and its economic policies should be in line with world practice.''
In 2001, China's then-Premier Zhu Rongji invited Hu to join a committee that advises the government on reforming the nation's social pension system. Last year Hu became a board member of Bank of China Hong Kong (Holdings) Ltd., the Hong Kong unit of China's biggest foreign currency lender.
Ideas and Influence
Hu also lectures several weeks a year at Tsinghua University's National Center for Economic Research in Beijing, and at the Communist Party's training school once headed by China's president, Hu Jintao. Fred Hu's students, who learn Western-style finance theory, include party cadres, government officials and executives of state-run companies such as PetroChina Co. and China Ocean Shipping Group., he says.
Students ``let us know the thinking in China,'' says Hu. ``It's a good way to exchange ideas and have influence.''
Says Wu Huimin, who helps manage global assets worth $750 billion at State Street Global Advisors in Hong Kong: ``Hu understands the policy-making process in China. His comments are more consistent with China's interests and thinking'' than those of other economists.
Hu's comments proved correct in 1997 and 1998 as the Asian financial crisis ravaged the region's currencies. At the time, Merrill Lynch & Co.'s Hong Kong-based senior economist, Nicholas Kwan, forecast China would have to free the yuan. Schroder Investment Management (HK) Ltd. and Citigroup Inc.'s Salomon Smith Barney brokerage unit followed suit.
`Catastrophe for China'
This time, contrary views to Hu's are more robust. Donald Straszheim, Merrill Lynch & Co.'s former chief economist and now head of Straszheim Global Advisors in California, says: ``There is a long way to go before China makes any move to change its exchange-rate policy.''
Morgan Stanley's Xie agrees. ``If China caves in to pressure to revalue the yuan, it would spell catastrophe for the country,'' he says. Xie predicts China will not move ``in the foreseeable future.''
Bryan Sanderson, chairman of Standard Chartered Plc., says he believes China should make the yuan more flexible at some point, though not be rushed into it. ``The Chinese government would be well-served to act in their own national interests, because the global interest that's being represented to them is capable of all sorts of interpretations,'' Sanderson says.
Student of History
China's central bank governor, Zhou Xiaochuan, has remained noncommittal. ``Whether the yuan exchange rate should be pegged to the U.S. dollar or pegged to a basket of currencies, this policy can be discussed,'' he said in the state-owned Financial News newspaper Sept. 3, the day after meeting Snow in Beijing.
Hu, who says membership of the Communist Party he joined as a teenager probably has expired because he hasn't bothered to pay his fees, calls himself a student of history. His Chinese name, Zuliu, translates literally as ``six generations'' -- a tribute to his forebears. He chose Fred as an English name because it sounded nice, he says.
High above Hong Kong's financial district, Hu's 40th-floor office is furnished with desks and chairs in the style of China's ancient dynasties. He collects rare Chinese calligraphy and relaxes by watching films of Chinese historical dramas.
Now he says Goldman believes China may widen the yuan's trading band to as much as 5 percent within a year.
``History gives China a good lesson for handling the uncertainties of policy changes,'' says Hu. ``If change is needed, it should be done from a position of strength.''
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