BIZCHINA> Review & Analysis
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BIZCHINA> Review & Analysis
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Time to aim for better balance in growth
(China Daily)
Updated: 2009-06-25 07:19 Li Weigang, post-graduate student in Harvard University, recently interviewed Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at the university's Kennedy School of Government. Frankel spoke extensively on China's exchange rate policies. Following is an excerpt: Q: After joining the WTO, China gained some advantages and raised its foreign reserves to $2 trillion. Now many Western countries, especially the US, want it to increase the value of the yuan to reverse their trade deficits. Do you think it's an efficient way to reduce the US' huge trade deficit? A: US officials began pressing China to abandon its effective peg to the dollar in the fall of 2003. From the beginning, I have viewed these political efforts as misguided. First, I don't think raising the yuan's value would benefit overall US exports much (as opposed to the effect on bilateral trade with China), especially if other Asian currencies don't rise against the dollar simultaneously. Second, even if raising the yuan's value boosts US exports, the drop in the purchase of US Treasury bills by Chinese authorities is likely to push up US interest rates. That means the overall effect on US output and employment would be small, even if it is positive. Third, I think every country is entitled to choose a exchange rate regime that most suits it. It is true that surplus countries should take into account the implications for the world monetary system, particularly via the International Monetary Fund. But my personal opinion is that such exchange rate commitments are not on a par with commitments under WTO trade agreements. One reason is that it is hard for anyone to identify the correct currency policy. I think that language such as "violation of international agreements" and even "unfair manipulation" is not desirable in such cases, and threats of illegal trade retaliation are especially inappropriate. Having said that, I do believe that it is in the interest of a large country such as China to allow increased flexibility in its exchange rate over the longer run, and that particularly from 2004 to 2007, this meant allowing the value of the currency to be raised, which would have helped prevent overheating of the Chinese economy. (For more biz stories, please visit Industries)
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