Outlook: Living in exciting times as China mulls currency realignment

FirstGroup/GB; Pharmacies
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The Independent Online

In his bi-annual testimony to Congress over the past two days, Alan Greenspan, chairman of the US Federal Reserve, suggested it would be a good idea for the Chinese to float their currency, the renminbi, or at least revalue it upwards against the US dollar. For China this would amount to a complete reversal in a key tenet of economic policy, with possibly far reaching consequences not just for China and America, but for Europe too. Is there any chance of it happening?

In recent years China has replaced Japan as the country with which the US has its biggest trade imbalance. The deficit is already massive and it seems to grow bigger by the day. While Chinese imports have been broadly tracking the growth in exports, most of the imports come from Japan and the Far East, whereas most of the exports go to America.

As things stand the renminbi is pegged against the dollar and therefore moves up and down with the fortunes of the greenback. If it were floated it ought to rise strongly against the dollar until the trade imbalance is corrected. With America's trade deficit ballooning, the renminbi peg is a growing source of complaint among US policymakers. Memories are short, for the Clinton Administration had much to thank China for when the People's Republic refused to be drawn into the competitive devaluations which marked the Far Eastern economic crisis of the mid to late 1990s. If China had devalued then, it would have made an already serious trade imbalance a great deal worse.

Still, times change and according to Jonathan Story, Professor of International Political Economy at Insead and the author of a recently published book, China: The Race to Market, Mr Greenspan is absolutely right to be raising the issue anew. The trade imbalance is obviously damaging to the US, but it may also be doing China harm, and perhaps tangentially, Europe too.

In order to maintain the exchange rate at its present artificially depressed rate against the dollar, the People's Bank of China has been selling yuans and buying dollars, thereby accumulating huge quantities dollar reserves. This has in turn contributed to exceptionally strong growth in Chinese money supply and an uncontrolled expansion of credit, much of which is eventually likely to prove uneconomic. With GDP growth belting along at an annualised rate of 9 per cent, there's a high probability of a return to punishing levels of inflation. Some kind of a banking crisis already looks inevitable.

As a result, Mr Greenspan believes it would therefore be in China's best interests to allow its currency to revalue too. As successive generations of Sovietologists discovered, it is impossible to know what's in the mind of a totalitarian regime like China's, but the argument in favour of another currency realignment are certainly compelling.

In Professor Story's view, such is the pace of China's development story that it could easily tolerate a substantial reduction in its trade surplus, or even an outright current account deficit, without undue damage to growth. Recent history supports the contention that countries with big deficits grow more strongly than those that focus policy on winning in export markets. In this regard, the US and Britain stand in stark contrast to Japan and Germany.

China's reserves of foreign currency - $346.5bn of them at the last count - are in any case large enough to underwrite a long period of deficits, and its success in marketing the country as "factory to the world" will ensure a continued strong inflow of foreign investment into the indefinite future.

The renminbi/dollar peg is creating a wide array of tensions in international trade, not least with Europe, which might also benefit from an appreciating Chinese currency, and the dollar relief that would bring. Left unaddressed, the peg might eventually pose a threat to the free trade agenda more generally. We live in interesting times, as the Chinese might say.

FirstGroup/GB

FirstGroup's takeover of GB Railways may prove to be the catalyst which sparks a wave of consolidation in the train industry. Moir Lockhead, the chief executive of FirstGroup, appears to be operating on the principle that if the regulator kicks him off a franchise, simply buy up one of the companies shortlisted to replace him.

FirstGroup was excluded from bidding the Greater Anglia franchise, while GB made the shortlist. There is no guarantee it will win the franchise even with the acquisition of GB, but its prospects look a whole lot better than they did a month ago when Mr Lockhead was contemplating a judicial review in order to muscle his way back into the reckoning.

First Group is paying £20m for GB Railways as it stands at present, with the promise of up to a further £20m if GB is successful in the bidding process. That sounds like a lot of money, but it may be cheaper than the courts, where the bill mounts up very quickly when the legal meter starts running. What's more, even if FirstGroup had won against the Strategic Rail Authority, there is no certainty it would then have gone on to win the Greater Anglia franchise.

Meanwhile there would have been every certainty of alienating the regulator, which though psychologically satisfying, would not have made good business sense. Richard Bowker, the chairman of the SRA, does not take prisoners. FirstGroup obviously thought a bid for GB at a 100 per cent premium to market value before bid speculation began a fair price to be paying for a quiet life.

The lawyers' loss will be the investment bankers' gain. The last Conservative administration paid a king's ransom in advisory fees to the City in its haste to get the railways sold off before it lost the election. The privatisation turned out to be more like an explosion than a privatisation, as the rail industry was broken up into more than 90 separate businesses. What we may now be seeing is the first stage in the process of sticking it all back together again. Something very similar has already happened in the energy market, where there are half the number of electricity companies that existed at privatisation. Consolidation has also been the order of the day in the once fragmented, privatised bus market.

In the case of rail, the 26 existing passenger franchises are already slated to come down to 20, and there is every prospect that the ten owners of these businesses will also shrink in number. National Express, the other big beast in the railway jungle, has already spoken openly of merger and acquisition. It looks as if the investment banks, accountants and lawyers will make their money all over again by putting Humpty back together again. It will make a small number of people a lot of money. Whether it will make the trains run on time any better is anyone's guess, but why does the answer to the question seem so likely to be no?

Pharmacies

The last time I put pen to paper on pharmacies, which was to support the OFT's plans for complete deregulation of the pharmacies market and lambaste the Government for its apparent hesitation in implementing them, I received a barrow load of complaints from aggrieved pharmacists.

At the risk of re-offending, here goes again. The Government is today expected to confirm it has largely rejected the OFT plans, which run counter to its desire to see community pharmacists play a greater role in giving advice and information to the public. I'm sceptical of this idea, which I think motivated more by a desire to cut back on prescription drugs, which the Government largely pays for, and have them replaced with over-the-counter sales, which patients pay for, than a genuine interest in public health. But my main gripe is with the idea that public health authorities rather than the market should continue to decide where and to whom pharmacy licences are granted. The public seems unlikely to benefit from such centrally directed planning.

jeremy.warner@independent.co.uk

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