Currency Reform

Economist: Keep momentum moving

By Zhang Haizhou and Zhang Chunyan (China Daily)
Updated: 2010-11-12 07:32

LONDON - A leading British economist warned attendants at the G20 Summit in South Korea not to focus on the issue of a "currency war", but to address other important topics.

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"I fear, there's no winner in this (currency war) because not everybody can devalue against everybody else. It's not possible to achieve that," Sir Howard Davies, director of the London School of Economics and Political Science, told China Daily during a recent exclusive interview.

On Beijing's row with Washington over the RMB's exchange rate, Davies said he does not share the view of some US Congressmen who label China as a currency manipulator, nor does he think the RMB should appreciate suddenly.

"However, over time, as China becomes wealthier, the likelihood is that its exchange rate will strengthen. That's the trend," he said, adding that the RMB's gradual appreciation will benefit China in the long run.

He also warned that the world is moving in the direction of a currency war, though it is "not a deliberate one".

The term "currency war" has been in the headlines over recent months. It is set to rank among the summit's top priorities, despite chief financial officers from G20 countries having recently vowed to avoid it during the meeting, which opened in Gyeongju on Thursday.

China is under mounting international pressure, especially from the United States, to appreciate its RMB. Meanwhile, other countries like Japan, South Korea, Australia and Switzerland are trying to hold down the value of their currencies to boost trade as the world emerges from the financial crisis.

Most recently, the US Federal Reserve last week announced a new round of quantitative easing - pledging to buy $600 billion of government bonds - to prop up its ailing economy.

The move has triggered a backlash from other countries, including China, Russia and other emerging markets. A central bank adviser said China should "set up a firewall" to protect itself, because uncontrolled printing of the US dollar will drive more liquidity into emerging markets.

Even though the yuan's appreciation could "in principle" help the US economy, Davies noted Washington's economic problem is "predominantly with the US".

"The core of the problem for the US is that, for a long time, they overconsumed," Davies said, noting confidence is currently "fragile" in the country.

But he is "skeptical" about the US administration's ability to boost confidence after US President Barack Obama's Democratic Party recently lost control of the House of Representatives to the rival Republicans.

"I think the Americans just have to be more patient," he said, adding that he hopes households gradually feel more comfortable.

The G20 also needs to keep the momentum moving for trade and financial regulatory reforms, said Davies, who is also a member of the advisory boards of the China Banking Regulatory Commission and the China Securities Regulatory Commission.

In particular, he urged the summit to give fresh impetus to the stalled Doha Round of trade talks, which would be beneficial to all.

China's domestic consumption

Boosting consumption in China would help rebalance the world economy, Davies said, adding that how to boost domestic consumption and maintain rational investment are key challenges China faces as it undergoes economic growth.

"But is China ready to make decisions to allow that to happen?" he asked. "China has argued for some time that consumption should be a larger part of the economy."

China's consumption accounts for 35 percent of its GDP, according to Davies, while it is 60 percent on average in the developed world.

In the recently published proposal of its 12th Five-Year Plan (2011-2015), the government vowed to rapidly increase people's income and transform its economic development model to one that is more oriented toward domestic consumption, instead of being export- driven.

Looking to the future, Davies urged China to build a "more robust social security system and a pension system", though they are long-term projects that "won't revolutionize things overnight."

China further needs to address the problem of over-rapid investment, Davies said, expressing admiration for the country's ability in recent years to react to asset bubbles and slow them down.

China Daily