Jeremy Warner's Outlook: Chinese bite bullet on renminbi reform, but it's not enough to buy off the protectionists

BPB: the attractions of plasterboard
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The Independent Online

It sounded dramatic. According to the first reports, China was abandoning its currency peg against the dollar. This would indeed have been a seismic event, given that the undervalued renminbi is one of the major causes of the imbalances building up in the world economy.

In practice, it turned out to be little more than a tremor. China is revaluing its currency upwards against the dollar by just 2.1 per cent. Admittedly the new peg will be applied against a basket of currencies including the euro, rather than just the dollar, but the trading band of just 0.3 per cent around central parity is left unchanged. In political terms, China's move may mean something. In economic terms, it is of hardly any significance at all.

Indeed, the whole thing smacks of cynicism. By doing something and hinting that there may in time be more to come, China hopes to buy off Washington's growing protectionist lobby.

But if that's its purpose, it scarcely looks likely to succeed. The hawks of Capitol Hill were calling for at least 10 per cent, and some for as much as 20 per cent, which is possibly where the currencies would settle if the rate were determined by market forces. To revalue by just 2.1 per cent is almost worse than nothing, for to the protectionists it looks insulting and might bolster their case for measures to bring China to heal.

The present plethora of trade imbalances is generally thought one of the biggest threats to the health of the world economy. By far the most striking of these is that between China and the US. Clocking up at the rate of about $15bn a month, the trade gap with China is the biggest single cause of America's ever growing current account deficit. If markets had their way, this imbalance would already have resulted in a much weaker dollar, making imports more expensive and American goods and services more competitive. The currency peg has prevented the necessary market adjustment.

Yet one of the reasons the peg has been tolerated for so long is that it isn't just a one-way street, of benefit to China's fast industries but scarcely anyone else. In fact there has been a big economic benefit to the US too. Cheaply priced goods from China have helped to keep the lid on inflation, which in turn has allowed exceptionally low interest rates and record levels of debt-fuelled consumption.

The chief irony of this relationship is that China is not just providing the goods for American consumption, it is also lending the US much of the money to finance it too. Household debt in the US is at record levels. This finds its mirror image in China, where household savings are also at record levels.

The mechanism by which Chinese savings are transferred into American consumption is that in order to keep the renminbi artificially depressed against the dollar, the People's Bank of China must sell its own currency and buy dollars.

Most of the consequent build-up in foreign exchange reserves finds its way into US Treasury bonds, which in turn helps fund the Federal budget deficit at relatively low interest rates. On a purely moral level, it seems at least odd that one of the world's poorest populations should be helping to fund conspicuous consumption in the world's richest, another reason for thinking these trade and capital imbalances ultimately unsustainable.

As Herb Stein, a former economic adviser to President Nixon, once remarked in characteristically to the point manner, if something cannot carry on then it won't. The curiosity of America's trading relationship with China is that it has carried on uninterrupted for an awfully long time now, defying all predictions of an implosion. Yesterday's little bit of tinkering with the renminbi peg scarcely looks destined to bring it to an end either.

So the unsustainable is destined for the time being to carry on being sustained. Generally speaking, the longer an economic imbalance is allowed to persist, the worse the fallout when eventually it does come to an end. The slight easing in the peg announced yesterday isn't nearly enough to allow for a gentle unwinding of these imbalances.

Nobody expected the Chinese to float the currency all in one go, and the optimists would say that what happened yesterday is just a staging post with there now being little doubt about the final destination. China must be allowed to go at her own pace. Regrettably, patience among those who worry about American jobs and industries is running thin. The dangers of a protectionist backlash are today greater than at any point in recent history. China must do more and soon to prevent such a disastrous outcome.

BPB: the attractions of plasterboard

When rumours began to circulate that PepsiCo might bid for Danone, all hell broke loose in Paris, with French government ministers queuing up to say they would do all they could to block such a scandalous assault on the pride of France's food industry.

When Saint-Gobain confirmed it might make an offer for BPB there wasn't even a murmur from ministers or Whitehall. Admittedly, everyone had rather weightier matters on their minds yesterday, while BPB scarcely stands comparison as a symbol of industrial might with the iconic Danone, owner of Evian mineral water and a legion of other internationally recognised brand names.

Yet though BPB may be dull, boring and little noticed except when it gets itself into trouble with competition regulators, the company is within its own industry just as much of a national champion as Danone, a global leader with 40 per cent of the European plasterboard market and some 16 per cent of the North American market.

That equates to roughly 20 per cent of the global market, which makes BPB the biggest by some way. As a product, plasterboard may be dull as ditch water, but it's highly profitable, with margins of around 13 per cent at BPB, and, thanks to the insatiable appetite of the Far East, it is growing at a rate which would do credit even to a racy technology stock - some 5 to 6 per cent a year.

Over the past three years, investors have finally woken up to the company's attractions, propelling it last month into the FTSE 100. BPB is certainly not Danone, yet under the leadership of Richard Cousins, it has become something of a national treasure, well run and with excellent prospects.

If Mr Cousins can be faulted at all, it is perhaps in having plasterboard too much in his veins. Unlike others, which have played the consolidation game across the building materials sector as a whole, he's stuck to his knitting. As Saint-Gobain, a major distributor for BPB in France, yesterday demonstrated, that makes him a target.

Over the past five years, the cream of Britain's building materials industry has been snapped up by foreign companies, from Blue Circle, which was bought by Lafarge, to RMC, bought by the Mexicans, and Aggregate Industries, acquired by Holcim of Switzerland. Today there's little left of the FTSE building materials sector of any significance outside Pilkington, Hanson and Baggeridge Brick

Should this concern us? It certainly would the French, who have at least two national champions in this field, Lafarge and Saint-Gobain. They can buy us; even if we had companies large enough, we almost certainly couldn't buy them. But actually, it matters not a jot. Provided Saint-Gobain can find the £7 a share plus it would take to persuade BPB investors to part with their shares, no attempt should be made to stop them. Saint-Gobain might eventually make the deal work at such a price, but empire building generally doesn't pay dividends in the long term, and buying foreign assets certainly isn't any kind of a panacea for France's economic problems.

Meanwhile, BPB investors get the chance to stick their money into something else, which is one of the dynamics which keeps the British economy growing.

j.warner@independent.co.uk

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