Saturday, October 20, 2007

What’s good for China is good for the world economy, a top Chinese central bank official said yesterday, reflecting growing Chinese confidence in the role they have in driving global growth.

Taking a strong stand against calls by U.S. political leaders for China to stop fixing its currency against the dollar, Wu Xiaoling, deputy governor of the People’s Bank of China, told the Institute for International Economics that such a move would be premature and harmful to China.

Mrs. Wu said the government has not yet laid the groundwork for redirecting economic growth away from exports and toward Chinese consumers. China’s policy of maintaining a weak currency against the dollar promotes exports and discourages imports.

“If we rush things too much, this will hurt the Chinese economy and the global economy,” she said. “We are moving in a smooth manner, and this will help us all.” China’s yuan has gradually risen by about 10 percent against the dollar in the past two years as the central bank slowly loosened controls under a liberalization plan Mrs. Wu said would continue.

The U.S. for decades has been the world economy’s main engine of growth. China’s ascension to that status this year has come as U.S. growth is faltering because of a deep housing slump and mortgage crisis. The credit woes have dampened growth in Europe and Japan, but have scarcely had any impact on China, where growth is running close to 12 percent this year amid big booms in the country’s housing and stock markets.

The currency distortion has disguised the dynamic role China is playing in world growth. As measured in dollars, China’s economic output remains only about a third of the U.S. economy at nearly $4 trillion. But when measured under a system developed by the International Monetary Fund to screen out currency distortions, China’s economy has vaulted from about $4 trillion in 2000 to $12 trillion this year — nearly the same as the United States‘.

To attain the high growth rates needed to provide jobs to more than a billion Chinese, China has encouraged global corporations to use the cheap labor they find there for assembling goods and then re-exporting products to the U.S. and other developed countries. This export-driven growth, which is found to varying degrees throughout Asia, has led to gigantic trade surpluses with the U.S. and other countries, enabling China to amass foreign-exchange reserves totaling more than $1 trillion.

U.S. growth, meanwhile, has been weighed down by soaring deficits with China. U.S. leaders have urged China for years to remedy the potentially dangerous trade imbalance by allowing the dollar to decline against its currency, as most economists say it would do if China removed its controls. Some members of Congress have threatened trade sanctions if China fails to take action.

The standoff over the Chinese currency comes as the dollar is reaching new lows against the euro, Canadian dollar, British pound sterling and a host of other currencies that are allowed to float freely against the dollar. Foreign exchange analysts say the longer China and other Asian countries fight the trend toward depreciation caused by huge U.S. trade deficits, the more the dollar will fall against free-floating currencies.

China yesterday ironically cited the dollar’s drop against other currencies as yet another excuse for standing pat, saying that if China went along with devaluating the dollar it could cause a worrisome destabilization of global markets.

“The dollar problem is getting worse” and China’s government is worried about the risk of further declines, said Fan Gang, a Chinese monetary policy adviser, who, like Mrs. Wu, is in Washington for weekend meetings of the World Bank and International Monetary Fund.

Despite China’s protests, the U.S. and other Group of Seven nations are expected to call for a stronger yuan in a statement at this weekend’s meetings.

Mrs. Wu said China is embarking on a far-reaching economic restructuring program that will lead to more balanced trade and exchange rates. China’s government and industries are working toward a broader distribution of income among the population that will help raise living standards and promote consumer spending. The boom in stocks and housing investment is another development that is helping place more money in consumers’ pockets, she said.

The natural result of this internal evolution will be a waning of the country’s reliance on exports for growth, and an increase in demand for consumer goods and imports that will do more than exchange rate adjustments to remedy the trade imbalance, she said.

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