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From: wolda002@umn.edu
Date: Tue Sep 21 2010 - 02:03:07 EDT
Beijing is right to ignore the currency pleas
By Stephen King
Published: September 19 2010 20:28 | Last updated: September 19 2010 20:28
While everyone in Washington thinks the renminbi should be revalued, not
everyone in China agrees. Maybe the Chinese are right? It is, after all,
easy to blame trade imbalances on the evil exchange rate machinations of
others. In the mid-1980s Japan’s surplus was supposedly the consequence
of a deliberately undervalued yen. But while the yen has since risen a good
deal – as shown by last week’s decision by the Bank of Japan to lower
the exchange rate – its surplus has stubbornly grown too.
Now it is China that attracts Washington’s ire. The US rightly recognises
China as its global rival in the 21st century, one reason Beijing is
unenthusiastic about caving in to Washington’s demands. But China’s
reluctance also reflects more justified doubts. The conventional wisdom was
expressed clearly by Tim Geithner, the US Treasury secretary, in his
congressional testimony last week: undervaluation “helps China’s export
sector and means imports are more expensive in China than they otherwise
would be”, thereby leading to lower domestic consumption. This argument
assumes that movements in nominal exchange rates lead to lasting
adjustments in competitiveness, and also that these in turn will deliver
reductions in current global imbalances. Both the arguments are badly
flawed.
On the first, China’s per capita incomes are still low, about $3,000 per
annum compared with $40,000 in the US. The gap is slowly closing because of
the way China’s new openness has attracted high-quality capital and
management which, in combination with a surplus of remarkably cheap labour,
makes China super-competitive. In other words, China’s growing share of
world trade has nothing to do with undervaluation.
Moreover, a revaluation would do little to change China’s competitive
position. The most important resource misallocation in China is
under-utilised labour. China’s almost limitless reserve of poor rural
workers constrains how quickly wages can rise – given that modestly
higher wages attract more labour to its booming cities, which in turn limit
further wage gains. Should the renminbi appreciate, those limits would
become even greater and a temporary loss of export competitiveness would be
offset by lower domestic wages. China’s leaders, therefore, are quite
right to argue that a rise in the exchange rate would achieve little beyond
the very short term and would harm China’s workers in the long term.
The second assumption is just as doubtful. It is true that policymakers
persistently strive to shift exchange rates as means of economic
“rebalancing”. Japan tried in the 1980s, but as its exports softened so
its economy boomed, paving the way for the late-1980s bubble and the
deflationary stagnation that followed. In the UK, sterling fell in 2008,
but trade performance remains miserable. China could quite fairly cite
either example as a reason not to move aggressively.
But does the rise in Beijing’s foreign exchange reserves not prove that
China is manipulating its exchange rate? Even here I am not convinced.
China is likely to want to switch out of US debt into a broader range of
assets, including American companies. Yet Congress could hardly be less
enthusiastic. Indeed, given the House of Representatives tends to prohibit
Chinese takeovers on national security grounds, China is almost obliged to
invest its surplus in dollars.
Because China is now the second-biggest economy in the world, by definition
any renminbi appreciation is simultaneously a dollar depreciation. So after
all of this, it is probably more accurate to describe America’s exchange
policy as one of dollar devaluation, rather than renminbi revaluation –
reflecting not America’s trade difficulties but its excessive debts.
Should the dollar decline, the value of all those Treasuries issued to
support America’s financial system would be worth a lot less in renminbi
terms. And that, to the Chinese, would feel suspiciously like a default. No
wonder they are not keen on seeing a rise.
So what can be done? The US needs to pull back from what is becoming
increasingly protectionist rhetoric. Americans should not forget that their
own fiscal stimulus has been possible only thanks to the deep pockets of
creditor nations such as China. Sanctions would simply send the world into
a downward spiral of protectionism, exchange rate upheavals and interest
rate shocks.
Far better, then, for the US to recognise that mutual dependence between
these two superpowers makes any such threat counterproductive. Meanwhile,
the US should work with Beijing to push much-needed social security and
consumer credit reforms in China’s domestic economy. Until these happen,
and Chinese households learn how to spend rather than save, China’s
current account surplus will not go away, no matter where the renminbi ends
up.
The writer is chief economist at HSBC and author of ‘Losing Control: The
Emerging Threats to Western Prosperity’
Copyright The Financial Times Limited 2010
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