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The Dollar’s Not Almighty Anymore: A Little Dose of Fear Among the Elite Can Be a Good Thing

 

Shanghai -- I was talking yesterday with the chief financial officer of a US-based drug firm that operates here in China, producing for the Chinese market, and got an up-close look at how bad things are for what used to be called the Almighty Dollar.

The company in question, a joint venture between a very profitable U.S. drug company and a local Chinese company, is quite profitable itself.

The guy was explaining to me that his firm needed to add another factory, because the one they had was running full-tilt and couldn’t keep up with demand. That might sound like a simple problem, and one that most enterprises would be happy to confront, but the shrinking US dollar, and concerns in China about inflation, complicate things.

You would think that it would be a simple matter of the parent company’s sending over the $50 million or so that it would cost to build the new plant and that would be that, but it turns out that the dollar is falling so fast against the Renminbi (RMB), the Chinese local currency, that no contractors or other vendors necessary for setting up a new facility are willing to accept it as payment. That means the company has to try and come up with the construction costs in local currency.

I won’t go into the arcane machinations that involves, except to say that Chinese financial authorities and the country’s central bank, the People’s Bank of China (PBOC), aren’t letting local banks or foreign-owned banks with offices in China lend money without going through a tough approval process, the outcome of which is iffy, and they are setting interest rates at 6.5% for those loans they do approve, which is a pretty stiff rate to have to live with. So there are no easy options.

The important point is that the dollar is being viewed here in China the way people in the U.S. have long viewed Mexican pesos... or Chinese RMB.
The dollar doesn't buy as many RMB as it used to, and now nobody even wants it in ChinaThe dollar doesn't buy as many RMB as it used to, and now nobody even wants it in China

That's sure a big switcheroo.

I remember back when I was a Fulbright professor at this city’s elite Fudan University, back in 1991-92, people wanted dollars so badly that you had to be crazy to go to a bank to change them at the official rate of about 8 RMB to the dollar. Practically anyone you met, even a stranger on the street, was willing to swap you RMB bills at a rate of 9 or even 10 RMB to the dollar. I had an American friend who told me he was riding his bike into the city, and was on a crowded street packed solid with slowly moving bicyclists when everyone was forced to press to the side to allow a bus to pass. His bike ran up against a neighboring cyclist and the handlebar cut a gash in the man’s wrist, apparently severing a small artery, which began gushing blood. My friend, who like me spoke Chinese, began apologizing profusely, and was getting off his bike to offer help when the man, his arm gushing blood, began asking, “Change money? Change money?”



story | by Dr. Radut