PAUL SOLMAN: The heart of Beijing, a few blocks from the Forbidden City and just off Tiananmen Square, where photography is virtually prohibited and plainclothes policemen are said to be as numerous as tourists. Nearby, the seat of Chinese power since Mao Zedong's day, the Great Hall of the People, with its famous mural of the Great Wall of China.
CHENG SIWEI: Hi.
PAUL SOLMAN: Hi.
CHENG SIWEI: Good morning.
PAUL SOLMAN: Good morning.
PAUL SOLMAN: We were here to interview one of China's current top leaders, Cheng Si-wei, an economist in the 2,000-year-old tradition of Confucian scholar politicians.
The author of 28 books, Vice Chairman Cheng is also known as the godfather of venture capital in China.
So our first question: Why has China become such a magnet for foreign investors?
CHENG SIWEI: First, we are one of the most safe countries in the world now.
PAUL SOLMAN: Safe for an investor?
CHENG SIWEI: Yes. We have a social stability and also, you know, less terrorists.
PAUL SOLMAN: Less terrorists?
CHENG SIWEI: Yes. And the second is China is a huge market, you know, with potential. And the third is China has the cheaper and also the high-quality labor. As you know, the hourly wage in the States is around $16; in Mexico, $4; and in China, 50 cents. So we have the competitive edge.
PAUL SOLMAN: It's that competitive edge, of course, that's prompted Congress to protect, for example, U.S. textile workers by threatening stiff tariffs on Chinese goods. But Mr. Cheng himself visited South Carolina recently and had a different take.
CHENG SIWEI: Textile industry in the United States is a sunset industry. You cannot compete with developing countries. So the best way is you should, you know, readjust your economic structure.
PAUL SOLMAN: But isn't it hard to readjust given that so many workers, like those in the textile industry, have spent years learning particular skills and may be a little old to find equivalent new jobs?
CHENG SIWEI: That's true. But if you ban all the textile exports from China, you cannot solve this problem because the Mexican textiles and the textile exports from the Southeast Asian countries, you know, will replace the exports from China.
PAUL SOLMAN: But not if we put strict barriers against all imported textiles.
CHENG SIWEI: That's your way to go back to protectionism. That's against the free trade ideas, right?
PAUL SOLMAN: Well, maybe in certain industries free trade just is not good for America now.
CHENG SIWEI: Well, that's another issue, anti-globalization. But do you know, actually, I think the Americans will benefit from globalization very much.
For example, just according to Morgan Stanley in the past ten years, Americans were benefited from cheap Chinese goods to around 600 billion U.S. dollars.
PAUL SOLMAN: Because U.S. consumers spent $600 billion less than they would have spent by buying the goods that came from China?
CHENG SIWEI: Yes. Some people told me, you know, average Americans, you know, they use actually now in their daily life, they use many cheap Chinese goods from morning to the evening; when they woke up, their blanket is made in China. When they wear shoes to go jogging, the shoes, Nike shoes, made in China.
PAUL SOLMAN: Nike.
CHENG SIWEI: Yes. And they use a toothbrush, it's made in China. The Colgate Toothpaste is made in China.
PAUL SOLMAN: Colgate Toothpaste is made in China?
CHENG SIWEI: Certainly. American people are really benefiting from cheaper Chinese goods. So I think if you raise the standard, then first we hurt American people themselves.
PAUL SOLMAN: But next to be hurt: Chinese people, especially rural Chinese. Jobs for them may be lost if trade tensions scare off foreign investors who employ them.
CHENG SIWEI: Actually, you know, I think the biggest challenge to us is the dual economic structure in China.
PAUL SOLMAN: The dual --
CHENG SIWEI: The dual economic structure in China. That means the people in the city enjoy a much better life compared with people in the countryside. The average income per capita in the city is 3.23 times higher than the peoples in the countryside.
The purchasing power of the people in the city is four times than the people in the countryside. And the people living in the city enjoy a much better, you know, public service, social security and education, and other things. If we cannot, you know, narrow the gap between the people in the city and between people in the countryside, you know, it will cause some social problems, you know.
PAUL SOLMAN: Social problems?
CHENG SIWEI: Social problems, yes.
PAUL SOLMAN: After listening to Mr. Cheng, it seemed that protective tariffs might indeed hurt both American consumers and Chinese workers alike. But the tariff threat is directly connected to another contentious issue: America's demand that China change its decade-long policy of linking its currency, the RMB, to the value of the U.S. dollar.
The U.S. has been pressing the Chinese loudly for the past two years to allow or make the RMB rise in value against the dollar; that would make the dollar cheaper and thus American goods cheaper, better able to compete. Congress was threatening textile tariffs if China didn't revalue.
PAUL SOLMAN: Let's move on to the revaluation of your currency as an issue.
CHENG SIWEI: Oh, wow. (Laughs)
PAUL SOLMAN: I know you're dying to talk about that.
CHENG SIWEI: No problem.
PAUL SOLMAN: Our interview took place in early June, before China actually did revalue modestly and open up the possibility of further changes. And perhaps we should have shown you this interview earlier, given that Mr. Cheng could, in retrospect, be seen as having hinted at what was about to happen.
CHENG SIWEI: First, we will keep RMB relatively stable on a rational and balanced basis. That means we don't want to make a big move for that. The second step is we will change our foreign exchange system from basically pegging to the dollar to pegging to a basket, weighted basket between dollar, euro and Japanese yen.
PAUL SOLMAN: So that if the dollar goes up or down dramatically, you don't go up or down dramatically.
CHENG SIWEI: Our fluctuation is much more smaller, is much smaller. And our third step is to make RMB fully convertible, you know. This is a must if we want to, you know, have a free trade system.
PAUL SOLMAN: China has now cautiously taken steps one and two, slowly starting to revalue the RMB upward and pegging it to a basket of currencies. But it has yet to take step three, making the RMB fully convertible, for fear that an abrupt change in policy would inflate a speculative bubble in China.
Meanwhile, as Mr. Cheng was at pains to point out, China thinks it's been helping the U.S., helping finance our budget deficits by lending us much of the foreign currency it earns from exports. It lends by buying our IOUs investing, that is in U.S. bonds.
CHENG SIWEI: We would like to generate profit. And the safest way to generate profits is buying the bond, although the return is lower. But it's safer. But we have other options and we can buy the other bonds.
PAUL SOLMAN: That's what Americans are afraid of.
CHENG SIWEI: If you take us as a friend, you will have a friend. If you take us as an enemy, you will have an enemy. So we don't want to fight with you. So please don't put pressure to us.
PAUL SOLMAN: What does pressure do to you? After all, our treasury secretary just did put pressure, didn't he?
CHENG SIWEI: Well --
PAUL SOLMAN: He tried to.
CHENG SIWEI: Well, your congressman put more pressure rather than your administration. They are under pressure and we are under -- I will say we're under threat, you know. They are threatening us. That's not good.
PAUL SOLMAN: What don't they understand about China and the Chinese tradition, Chinese character that would make you say it's not good?
CHENG SIWEI: Well, because, you know, the foreign currency issue is an issue of sovereignty, you know, as a country -- sovereignty. You know, so we have to decide this by ourselves. We don't want to change our foreign exchange rate under the pressure of other countries.
PAUL SOLMAN: But in this case, the pressure seems to have worked. So, will the U.S. declare victory and ease up on China or press even harder? Mr. Cheng's answer suggested that despite our apparent success, we might want to be careful.
CHENG SIWEI: We would like to solve these problems through dialogue and consultation rather than confrontation. But, you know, we have our own dignity. You cannot change culture because it has a 5,000 years tradition. You know, even the Cultural Revolution cannot change -- didn't change the culture of China.
PAUL SOLMAN: Cheng Si-wei, really appreciate your taking the time.
CHENG SIWEI: Thank you.