Op-Ed Contributors

No need to revalue yuan to help US

(China Daily)
Updated: 2010-11-11 08:24

As the G20 Summit opens in Seoul, South Korea, on Thursday, Zhang Haizhou and Zhang Chunyan discuss the "currency war", IMF reform and China's economic growth with Sir Howard Davies, director of London School of Economics and Political Science.

Q: What issues do you expect the G20 leaders to discuss and address?

A: I think the issues are probably different in different parts of the world. In the United States, it seems to be primarily of confidence. The US is still focused on reducing its debts.

The European Union (EU) faces a fiscal problem and its member states have to reduce their fiscal deficits in quite an aggressive way. Governments are withdrawing money from the economy to reduce their deficit. So there is nervousness about the EU recovery.

In China, it's a completely different picture. People are worried about asset price bubbles, credit expansion and excessive housing prices, even though Chinese authorities are trying to prevent the creation of (more) bubbles.

It's going to be a dull growth over the next two or three years in the US and Europe. We are looking at relatively low growth rates, 1 to 2 percent, nothing exciting.

Q: Do you expect the G20 Summit to achieve something?

A: I'm not particularly optimistic about that. Although there is a possibility of a solution that would benefit everybody, it's quite difficult to achieve that now. The US is politically blocked. It's quite difficult for its administration to act decisively to boost investment.

In China, there's clearly a lot of resistance against exchange rate adjustments, which I think in the long run will benefit the country. I don't think there is need for a sudden exchange rate adjustment and I don't think China should carry out one to help the US.

Q: So you think the yuan is undervalued?

A: Yes, I think so. I don't think it's undervalued to the extent some Americans allege. China's trade has been adjusting. Its trade surplus with the EU is coming down quite a lot. The problem now is predominantly with the US, which suggests it's partly an American problem, not just a Chinese problem.

So, I don't take the view of some US Congressmen who say: "This is manipulation". But I do think that over time, as China gets wealthier, the exchange rate is likely to strengthen.

Q: Do you think the G20 Summit will be dominated by the exchange rate and currency war?

A: I' m afraid it will. There are other big issues around but the truth is that the reporting will be dominated by the exchange rate.

I don't think it's a deliberate currency war, but it is moving toward that direction, unfortunately. I think the US Federal Reserve's prime aim is to loosen monetary conditions to lower long-term interest rates, stimulate investment and speed up the de-leveraging process. The lower the interest rate, the quicker you get out of debt.

But it's possible that if you push down the long-term interest rate hard, it could weaken the exchange rate.

Q: How can the US boost growth?

A: I'm skeptical whether the US can solve this problem through government action. You can't make people spend and borrow against their will. Most of the time consumer confidence is boosted by political and economic stability. Unfortunately, doing that in the US is not that easy now, because the (public) perception is that the administration is weak, otherwise it wouldn't have lost the midterm election. I think the Americans just have to be more patient.

Q: Is reducing EU votes in the IMF and giving them to under-represented economies really important or just a political move?

A: I think it's more political. But over time, the changing voting pattern will probably influence the IMF policy and increase its legitimacy.

The IMF has had one problem. People tend to see it as a kind of arm of the Washington Consensus. So, even if its recommendations are right, some people resist them fearing them to be a kind of American manifestation. I think it will be a difficult time for a while.

Q: What is your opinion about China's 12th Five-Year Plan (2011-15)?

A: China has been arguing that consumption should make up a greater share of the economy.

I certainly agree with the aspiration and I think that is part of the global rebalancing act. But is China ready to make decisions to allow that to happen?

For instance, it needs a more robust social security and pension system. Liberalizing interest rates would be helpful, too.

Q: Do you think China can achieve a "soft landing" in economic growth?

A: I'm quite optimistic about that because Chinese authorities have shown a lot of skill in recent years in moderating periods of excessive growth and gradually constraining them.

I've been impressed by the authorities' reaction to the bubbles and their efforts to prevent them from inflating further. And they are already showing some signs of success.

Q: What are the major challenges on China's road to economic growth?

A: How to stimulate consumption and strike a more balanced growth? (Those are the main challenges.) I think they're important because they'll help on the global front.

The level of investment in China is very, very high. And you can't help thinking that some of it is probably not very good investment.

China introduced the fiscal stimulus in November 2008, and the 4 trillion yuan has been spent quickly on a lot of projects. You can either spend money quickly, or you can spend it well, and you very rarely can do both at the same time. China did spend money very quickly on a lot of projects. But not all those investments are likely to deliver good returns.

(China Daily 11/11/2010 page9)