Shrugging off the chip

"The Japanese failed to achieve their goals militarily during the war, but everything they wanted they have managed to achieve since through economic means," said one official. "every home in China now contains an electrical appliance that was made in Japan."

It was as if he was reading from a well-thumbed script. "Every home in Japan, Europe and the United States now contains something that was made in China," I pointed out. He thought about that for a second. "But only cheap textiles and plastic items," he said.

"Maybe today," I replied. "How about five or ten years from now?"

I then went a step further, perhaps a step too far, and added: "You should have more confidence in yourselves." Which elicited a defensive: ?We are self-confident."

For 150 years and more now, one of the basic Chinese attitudes to the outside world has been: "They are bullying us. We are weak, and they take advantage of us." It is getting to be tired and even counter-productive, because it conflicts with the growing view inside and outside China of China as powerful, vigorous, youthful, striding confidently out onto the world stage.

Even inside the bureaucracy, they can feel this shift. When former Premier Zhu Rongji pushed through the conservative opposition and reached agreement for China to accede to the World Trade Organization in 1999, there were internal meetings all over the country to explain to the Guys that this was a good thing in spite (or it should have been because) of the inevitable impact it would have on the closed and comfortable state enterprise world.

An official who attended one of these meetings in Shanghai told me that one attendee stood up to lament the impact that this would have on the state-owned enterprise he controlled and on the poor staff who would now be exposed to the cold winds of global market forces. He started crying, and the feeling of the meeting turned against him. Concern about the impact of WTO entry was one thing, sobbing distress at China's alleged puny incapacity to handle the consequences was entirely another.

It is the psychology of the Opium Wars (for which I apologize at every opportunity), the psychology of weakness, and it is time to pack it up in a box and file it away on a shelf next to the Boxer Rebellion and the Treaty of Versailles. In Jewish parlance, the Chinese people have stood up already.

China, with foreign exchange reserves approaching US$1trn, is now in an economic position to play with the big boys, to cast a long shadow and to be confident of its own position and future in the world.

The GDP of Japan at this point is three or four times the size of China's, but the trend lines are clear and it is only a matter of time before they intersect. Which leads me to the view that China should be a little more relaxed about the Sino-Japanese relations. It would lose little by taking the high road with regard to the need for Japanese apologies and self-criticisms for the war and Yasukuni Shrine visits. Time is on China's side in all this, not Japan's. But strangely the Chinese government and people don't seem to have totally absorbed the fact yet.

It is all part of China's transition from small country psychology to big power psychology that is taking place so fast that it is quite understandable that it is difficult for everyone to keep up.

The recent visit by Zimbabwe's Robert Mugabe, who was honored and feted, may be another indication of how China's officials at the highest level are struggling with this shift.

Back in the 1970s when nobody paid any attention to China, perhaps it was understandable. China accepted anyone as a friend who would talk to them and foreign journalists in Beijing were invited to every foreign leader banquet at the Great Hall of the People so that they could see proof that at least someone likes us. Those days are gone, foreign journalists are no longer invited to these banquets, China no longer feels the need to constantly prove itself, in that way at least.

So why go out of the way to give credibility to Mr. Mugabe? It either has something to do with serious reserves of raw materials or else it is a serious lapse into the past. On reflection, I'll give them the benefit of the doubt. It was probably raw materials.

Back in April, I consulted with my good friend in Shanghai, Mr. Chaw Piaw, who is a black market money changer. I asked him about the prospects for a renminbi revaluation and after months of being noncommittal, he arranged the fingers of his right hand into the traditional Chinese sign for seven.

"July," I said. He nodded.

He was right, and legions of experts around the world were wrong.

I recently saw him again and bowed before him extravagantly, declared that "I am not worthy" in my best Wayne's World impersonation, invited him to be seated and reverentially asked him for his view on what happens next.

"More to come," he said.

When and how much?

"By the end of the year. Five percent."

Okay, but I need you to be more specific on the timing. He declined. This is important to me because I happen to have an outstanding bet on this very topic with Mr. Jake van der Kamp of the South Morna Chining Post, which would have been a lovely typo if it had been unintentional.

It was Mr. van der Kamp's view when I met him that the revaluation and the shift from a peg to a basket had virtually no significance. We disagreed about virtually every aspect, which was a lot more interesting than complete agreement, and agreed finally on a bet on one specific bit – the timing of the next shift in the reference point for the renminbi rate, that is, movement beyond the trading limit. He said it would be a long time; I said it would be before the end of September.

My thinking is that Chinese Communist Party chief Hu Jintao is visiting the United States in the latter half of September, and if the Renminbi has appreciated only 2.1%, then it means that much of the discussion time will be taken up with tedious demands from the United States for another revaluation and faster progress towards making the RMB rate market driven. If the Chinese do another revaluation ahead of Hu's meetings, of whatever amount, it takes the issue off the table and allows the Chinese a clear shot at talking about the topics closest to their hearts, most particularly Taiwan and trade.

I won't pretend that I am 100% convinced that I am right, and it could be that I will be treating Mr. van der Kamp to a glass of alcohol before the end of this month. The signals from the Chinese government on the prospects for further moves in the exchange rate have been mixed, which is entirely the way it should be, otherwise it would be one-way sure-fire bet for the speculators.

If anything, the market at this point probably agrees with Mr. van der Kamp. But in that central banks around the world have to always throw red herrings into the mix, the signals they have been giving in no way rule out a possible extra shift in the rate of a percentage point or two just before Mr. Hu steps into the White House.

Fingers crossed.