中国必须解决全球货币危机

I share the growing concern about the misalignment of currencies. Brazil’s finance minister speaks of a latent currency war, and he is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash.

The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.

Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation but it works much better.

This has been the secret of China’s success. It gives China the upper hand in its dealings with other countries because the government has discretion over the use of the surplus. And it protected China from the financial crisis, which shook the developed world to its core. For China the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.

It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat. Its currency moves have had a decisive influence on exchange rates. Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.

More recently, when Congressional legislation against Chinese currency manipulation emerged as a real threat, China allowed its currency to appreciate against the dollar by a couple of percentage points. Yet the rise in the euro, yen and other currencies compensated for the fall in the dollar, preserving China’s advantage.

China’s dominant position is now endangered by both external and internal factors. The impending global slowdown has intensified protectionist pressures. Countries such as Japan, Korea and Brazil are intervening unilaterally in currency markets.

If they started imitating China by imposing restrictions on capital transfers, China would lose some of its current advantages. Moreover, global currency markets would be disrupted and the global economy would deteriorate.

Internally, consumption as a percentage of GDP has fallen from an already low 46 per cent in 2000 to 35.6 per cent in 2009, as China expert Michael Pettis has shown. Additional investments in capital goods offer very low returns. From now on, consumption must grow much faster than GDP.

Thus both internal and external considerations cry out for allowing the renminbi to appreciate. But currency adjustments must be part of an internationally coordinated plan to reduce global imbalances.

The imbalances in the US are the mirror image of China. China is threatened by inflation, the US by deflation. At nearly 70 per cent of GDP, consumption in the US is too high. The US needs fiscal stimulus enhancing competitiveness rather than quantitative easing that puts upward pressure on all currencies other than the renminbi.

The US also needs the renminbi to rise in order to reduce the trade deficit and alleviate the burden of accumulated debt. China, in turn, could accept a higher renminbi and a lower overall growth rate as long as the share of consumption is rising and the improvement in living standards continues.

The public in China would be satisfied, only exporters would suffer and the currency surplus accruing to the Chinese government would diminish. A large rise would be disastrous, as Premier Wen says, but 10 percent a year should be tolerable.

Since the Chinese government is the direct beneficiary of the currency surplus, it would need to have remarkable foresight to accept this diminution in its power and recognize the advantages of coordinating its economic policies with the rest of the world. It needs to recognize that China cannot continue rising without paying more attention to the interests of its trading partners.

Only China is in a position to initiate a process of international cooperation because it can offer the enticement of renminbi appreciation. China has already developed an elaborate mechanism for consensus building at home. Now it must go a step further and engage in consensus building internationally. This would be rewarded by the rest of the world accepting the rise of China.

Whether it realises it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it. Either way, the Chinese trade surplus is bound to shrink but it would be much better for China if that happened as a result of rising living standards rather than a global economic decline.

The chances of a positive outcome are not good, yet we must strive for it because in the absence of international cooperation the world is heading for a period of great turbulence and disruptions.