Finally, we have a new blogger in the community who has moved all the way to South America to bridge-blog about the Chinese expansion there and other interesting stuff.

Tom Pellman is Double Handshake. He was an editor in a well known economics magazine in Shanghai, he is almost trilingual in Chinese and he is now in Peru to see that Latin America’s largest population of Chinese are enjoying their Pisco.

Have you noticed that, in China, most of the people you hear speaking Spanish are not European, but overwhelmingly Latin American? Did you ever wonder why so many Chinese are flocking to the Salsa Dancing schools, and why in Shanghai there is a latin night scene more active than the one in Barcelona, for example?

Well, in some places, language is not the only means of communication. And if you want to smell the Juan Valdes, you better keep and eye on these two continents, because things are moving fast under our very noses.

Double Handshakes.

This week David Dollar has a very informative post: On exchange rates, think multilaterally. It is an analysis of the RMB exchange rates and their change over time. Using one of those useful trade-weighted indexes that the World Bank likes so much, David goes over the history of RMB exchange rates from the 90s to now, drawing conclusions on the policies of the Chinese government and their consequences at each stage.

After some retrospective paragraphs that I absolutely recommend to read to anyone who wants to understand past Chinese currency policy, he goes on to speak of the future:

There is a lot of potential for misunderstanding in this area. China feels that it has had a rapid effective appreciation and now wants to see what the real effects are before going further.The U.S. is probably looking at a substantial devaluation of the dollar against other major currencies, as the immediate financial crisis wanes and the U.S. needs to rein in its consumption and save more. If that happens, it is not in China’s interest to follow the dollar down. It will take good coordination between China and the U.S. to resolve their large imbalances in a smooth manner.

And I have the same objection that I always make to the World Bank Chinese publications: they stick to strictly economic terms, and avoid Chinese politics as much as possible. OK, I can understand being part of the WB he is not as free as this anonymous blog,  and he prefers to not stick his nose into sensitive matters. The trouble is, looking at the economy without the politics around it leaves you completely blind to see the immediate future.

I am not even close to having the experience of David Dollar or the number crunching capabilities of the World Bank, but I have eyes to see that something very big is missing in his picture. Multilateralism? Misunderstanding? Before any misunderstanding can actually happen, there has to be a will to understand. And this is far from sure at this point.

I just copy here part of the comment I wrote on his blog to show what I mean:

Still, as you imply yourself in the post, economists are always better at explaining things in retrospect. I am not sure at all that Chinese authorities will do the right thing in 2009.

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We need to keep in mind that Chinese politics always give priority to internal issues over external image or foreign affairs in general. Examples of this abound in recent times, such as their attitude towards protesters during the Olympics, or their cancellation of latest EU Summit because of DL, etc.

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If it comes to a point where unemployment gets even slightly out of control I have no doubt that Beijing will do what it takes to avoid internal problems. Including playing with the RMB, engaging in trade wars, and all the while siding with the “people” against the “Western menace”.

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We should keep an eye on Unemployment and Currency.

Today was the opening ceremony of the 7th China International Aviation and Aerospace Exhibition of Zhuhai, the main fair of the industry in China. These last days, my Xinhua reader at the bottom of the page has been spitting some interesting news for the occasion, and international media have been quick to follow.

Everybody in China seems to be speaking this year about the development of a Chinese aircraft industry, that is, when we are not busy speaking of baby milk, olympics and taikonauts. Rumours abound of some brand new A320s bought by chinese companies which mysteriously disappeared from the market, and reverse engineering is in everybody’s mind.

In any case, the clear aim of the chinese government is to enter by 2015 the exclusive club of large commercial aircraft manufacturers, adding a third leg to the industry dominated by Airbus and Boeing, and trying to take a slice of the $3.2 trillion market expected over the next 2 decades.

The big news of the day is the signature of a contract for the supply of 5 ARJ21 medium size regional aircrafts to GE, one of the world largest lessors of commercial airplanes, with an option to acquire another 20 units under unspecified conditions. Xinhua highlights the headline China to sell 25 regional jets to U.S. market, but in fact GE will be leasing the 5 acquired units to chinese airlines, so the planes will be flying locally.

In case someone is surprised by the daring move of GE, it might be useful to explain that GE is also one of the largest airplane engine manufacturers, and China one of their most promising markets. Sure enough, China is making use of its market power, in a similar way as EU and US have used theirs in the past to support their flag aviation companies.

It is just as well, of course. It is clear by now that only a company counting with the support of a world economic superpower can make it in the difficult industry of large commercial carriers. But even with this support, the road shall be long and difficult for the Chinese.

In the first place, they have a long way to go in R&D, and many have serious doubts that they will manage to have their jumbo jets in the market by 2015. However, I wouldn’t expect this to be the major obstacle. Chinese have proven to be extremely fast in re-developing complex technologies, especially when they are already existing in the market. Some planned acquisitions of undisclosed foreign companies by the end of this year will grant even faster access.

The main objection from my point of view has to do not with technology, but with the tricky world of free consumer choice. A field which has typically proven more elusive to chinese reverse engineering than  advanced rocket science.

If there is a market where pristine reputation is essential, and especially in the areas of quality and safety, that is the market of commercial aircrafts. It is probable that by cutting into an oligopolic situation, and counting on some dumping practices, the chinese manufacturers can slash the current prices of Boeing and Airbus for similar airplanes. But who will be buying them? In other terms, who wants to fly in a chinese brand airplane, even at a discount fare?

The problems with safety of chinese products are very present in the world , with various scandals being uncovered every year. Made in China was already a synonym of cheap and unreliable, now it also means unsafe. It will take many years before this world spread perception can change and anyone feels comfortable enough to fly in a chinese airplane. Much longer than it will take to reverse engineer an A320.

Add to this that the major players in the industry, with strong lobbies in the 2 largest economies in the world, will make sure that everyone has a clear perception of the risks involved. And for all its political clout, China is still astoundingly hopeless at pulling the thin threads of international media to play her game, as James Fallows brilliantly explains in this much commented article.

In the field of image and communication, one First blunder can already be noted: on the day of the 7th Zhuhai fair, the Company (or companies) still doesn’t have a Name.  Indeed, the confusing conglomerate of state owned companies that develop the different models of airplane are completely unknown to the world, and even to most chinese. Note, for example, that the Xinhua article refers to the nascent jumbo aircraft company as COMAC, whereas the AP and Bloomberg reporters linked above call it CACC (!). Both are tentative efforts to simplify the original: Commercial Aircraft Company of China.

There is some serious branding work to do now, and it should be done as soon as possible. Hopefully China has learnt her lesson, and she will not be calling her new aircrafts “The Great Wall Aviation Company”, as in this hilarious old post that I found over at Imagethief.

Whatever they do, It seems clear that for a long time the airplanes will be limited to the chinese market, and only at a second stage they might manage to make it out of the country in any significant quantities.

It is a very long term bet, which is not based only on its uncertain economic returns. Clearly, political, strategic and military considerations enter the calculation of the chinese government. All things taken into account, the move can be a good one for China and for the rest of the world, ultimately improving the conditions for the final consumer.

It has been said many times that the large aircrafts market can only support two players in the world, justifying the near monopoly situation of Airbus and Boeing. It is very possible that in the long term China proves them all wrong, and many business books will need to be rewritten.

But before we get there, some things will really need to change in this country.