China's secret ambition: to compete with America in America.

• Author: Malmgren, K. Philippa

China looks like a one-way bet. But the conventional view is that it is a one-way race to the bottom. In other words, global manufacturing jobs will shift to China and the downward pressure on wages will force down the standard of living in America and across the G7. It is a race to the bottom. That seems to be the overwhelming fact of the world economy today. But it is an incorrect assumption.

China is a one-way bet, but it represents a race to the top. On a recent visit to China, I was struck by the views of the Chinese authorities on the renminbi issue. They are completely unmoved by American political pressure. After all, they say. Bush and Kerry and other American politicians may complain about the cheap Chinese currency, but those comments are aimed at winning votes in the rust belt. It has little to do with China. In reality China must fix the currency peg for clear and overwhelming domestic reasons.

The Chinese authorities argue that they are already committed to becoming World Trade Organization-compliant. Nothing can protect even China from the wave of market forces in the world economy. They have to get ready. And so, the government believes they have to force the dumb lucky manufacturers to stop being so lazy. Now well accustomed to an artificially cheap and fixed exchange rate, these companies have no idea how to hedge against currency risk. They have no idea that currency risk matters. These firms must be, as one official put it to me, "forced to learn to swim" in the turbulent flows of the world economy. That requires exchange rate flexibility over time.

Plus, the Chinese leadership understands that the key to real success lies in value added. National incomes can only rise so far on the production of cheap, simple, thin-margin products like plastic flowers (which brought a fortune to one of the richest men in Hong Kong, Li Ka Shing, and helped put Hong Kong on the world economy map). If you want the nation to get rich, you need somebody to make high-margin value-added products. You need the smartest and most entrepreneurial manufacturers to make a refrigerator that can compete with Maytag and a car that can compete with a Mercedes. And that is exactly what China is doing.

The brightest and most successful manufacturers in China are no longer content to make an incredible fortune by producing shoes for Nike at fifty cents a pair while Nike goes on to sell them to you for $120 a pair. They want to figure out how to build a...