Meanwhile, US Treasury Secretary Geithner paid a flying visit to Beijing last week to meet with Vice Premier Wang Qishan and ‘exchanged views on US-China economic relations, the global economic situation and issues relating to the upcoming economic track dialogue of the second US-China Strategic and Economic Dialogue, to be held in Beijing in late May.’
With President Hu in Washington, or even just after he’s left, there’s no chance that the US Administration would take the step too far of naming China as a currency manipulator. Prominent Chinese analyst of Sino-US relations, Wang Yong, this week argues that there’s far too much at stake in the relationship for the US and China for either side to lapse into irrational policy on this issue. The political hounds and their fellow travellers have been out in Washington, baying for the quick fix of a sharp RMB appreciation to deal with Americas economic ills.
There are many in China who see merit in appreciation of the RMB too, to ease inflationary pressures and contribute to the adjustment of external imbalances. But the idea that a large RMB appreciation is going to solve either China’s or America’s imbalance or the array of other problems the currency’s undervaluation is supposed to cause is extremely problematic. Yiping Huang, in our second feature piece this week, provides a careful review of the economic issues.
As Wang notes a Chinese-US trade and currency war would threaten the entire East Asian economy. Goods marked ‘Made in China’ have actually involved a complex division of labour across the region that involves participation by all the major East Asian economies from Japan to Indonesia. In the past decade or two, East Asian economies including Japan, South Korea, Taiwan, Hong Kong and Singapore have moved their assembly lines to mainland China to take advantage of its cheap labour costs, and they continue to target their exports at the US market. Sharp exchange rate adjustment would shake this around but wouldn’t knock out the surpluses, which require deep shifts in other, structural, policies to reduce savings and boost Chinese and regional consumption. The same is needed the other way round in America, to reduce excess consumption and boost savings.
Wang argues that the prospect of a trade war, or even worse a currency war, between the world’s two largest economies is destabilising the shaky recovery growth of the global economy. Given the complicated nature of the RMB exchange rate in the global economic context, the US shouldn’t listen to calls to take trade sanctions an breach its international trading obligations but do a careful calculation of all the costs and benefits.
There are bigger fish to fry, on nuclear disarmament, North Korea and the six-party talks and on Iran and the Middle East. Mishandling the exchange rate issue would damage the political relationship. And the exchange rate can be dealt with more properly step-by-step, through the Strategic Economic Dialogue (May) and the G20 (June) processes. The signals that China will begin ‘internationalising’ the RMB with a modest initial appreciation and trade within a wider band with the prospect of gradual appreciation over time are welcome. Huang suggests that China probably missed a good opportunity to exit from the soft peg exchange rate policy in late 2009, when growth accelerated, trade recovered, inflation returned. But it is not too late to do it now. After all, greater exchange rate flexibility is in China’s own interest. It can help stem budding inflationary pressure, improve economic efficiency, balance the economy and reduce unnecessarily external tensions.
But it will be no easy matter for President Obama to manage the domestic politics of staying even this rational course. It will require clear signs that China will step up to plate unilaterally and in the G20, not only with steady appreciation of its currency but with a major program of structural reform that address the distortions that are at the base of its imbalance problems.