China's Currency Stand and Japan's Lost Decade

As calls grow louder in the U.S. for the Obama administration to pressure China over its undervalued currency, it’s good to check in with William Fung, group managing director of Li & Fung, the giant Hong Kong-based trading company that sources goods from China and other countries for companies such as Wal-Mart and Talbot’s. I spoke to Fung today when he stopped by the Bloomberg office to talk about Li & Fung’s disappointing earnings. (More on that news here.) When it comes to the fight over the yuan, he doesn’t expect Beijing to budge. To understand why, he says, look back to Japan’s “Lost Decade,” the period after Japan’s real-estate bubble burst in the early 1990s. “Every time I talk to these guys [in China], they say ‘We’re not going to repeat Japan’s mistake,’” he says. For them, mistake was the deal the Japanese made with the U.S. and the Europeans back in 1985 to allow the dollar to depreciate against the yen. According to Fung, Chinese officials are convinced that agreement, signed at the Plaza Hotel in New York, doomed the Japanese. “They think the Plaza Accord was the beginning of the Lost Decade,” he says.

Some people outside China argue a yuan appreciation would help the Chinese achieve their goal of boosting domestic demand, making China less reliant on the export sector (which crashed after the Lehman bankruptcy). Fung doesn’t think Beijing’s ready to buy that line. “They fullY intend to follow Japan and Korea” and focus on exports, he says. “They’re not going to go to this Amercan-style consumer-spending-on-steroids economy for a while. They just don’t believe in it.” In order for Chinese consumers to start spending big, Fung says, Beijing first needs to establish a solid social-safety net so ordinary Chinese people feel more confident in spending rather than saving. “That takes time,” Fung adds, “as you have seen in America.”

One thing to remember: It’s in Li & Fung’s interest for China to keep the yuan down. The company’s traffic is largely one-way, to the U.S. If the yuan is undervalued and exports from China to the U.S. are cheaper, that should suit Li & Fung customers just fine.

Read the original story at BusinessWeek Eye on Asia Blog