By William Pesek
China must create a healthy economy; not one that is run on steroids, says William Pesek.
It’s as provocative an argument as an economist can make: China is stealing jobs. Paul Krugman did it on October 22, raising blood-pressure levels around Beijing. The idea that China is siphoning prosperity from other poor nations using an undervalued currency isn’t new. It’s just that a Nobel laureate writing it in The New York Times turns heads.China should boost the yuan now. Not because Krugman wants it or because it would help US treasury secretary Timothy Geithner. And perhaps not even because it would help many Asians. China should act because as 2010 nears, its economy desperately needs a measure of restraint.
Six months ago, it was still possible to give China a pass. Raising millions of people out of poverty becomes even harder in a global crisis. China’s 4 trillion-yuan ($586bn) stimulus plan and liquidity-pumping efforts beat all expectations. The risk now is bubbles, and that’s where the yuan comes in.
A stronger currency would help China control its economy today and set the stage for an even brighter future.
China will regret putting quantity before quality. The 8.9 percent annual growth rate it achieved in the third quarter is impressive on the surface. Below the surface, it’s not so good.
The opacity of Chinese data is one thing. How statisticians sitting in a room come up with a single figure offering a snapshot of the activities of 1.3 billion people and many industries at various levels of development over a 365-day period is hard to imagine.
A recent blog posting by Barry Ritholtz, chief executive officer of research firm Fusioniq in New York, asked: “Who believes China’s Bernie Madoff data?”
Nor does the conventional wisdom about China masterfully steering around the global crisis make sense. Economist Michael Pettis of Peking University in Beijing sees it as “growth on steroids.”
He’s right and it raises doubts about how China can find an exit strategy without a sharp slowdown.
China can’t, until it takes long-lasting steps to boost domestic demand — something a stronger yuan would achieve. It would enhance domestic purchasing power in a way massive public-works spending and rampant lending can’t. China is sacrificing the development of an organic economy for rapid growth today.
Hence efforts to hold down the yuan. China’s $2.3 trillion of currency reserves are the clearest manifestation of the determination to maintain a competitive exchange rate.
The problem Krugman is concerned about is a crucial one. By keeping the dollar up on a trade-weighted basis, China is delaying a badly needed rebalancing of global markets. It’s also taking demand away from poor Asian nations.
Similar arguments have been made over the years.
During a chat in 2003 with Hafiz Pasha, an assistant United Nations secretary-general and former Pakistani finance minister, he said: “Poverty reduction is important, but China ought not to do it at the expense of the rest of the region.”
Six years on, it’s still a highly sensitive topic that makes last weekend’s confab in Cha-am, Thailand, look all the more hollow. Beggar-thy-neighbour policies of the kind China is pursuing make a mockery of talk there of forming an East Asian bloc of 16 nations. Keeping the yuan effectively pegged to the dollar does little for Asian brotherhood.
The more immediate concern is asset bubbles and inflation, which China will regret in a few years. A stronger yuan would take tension out of China’s $4.3 trillion economy. The nation would no longer be standing in its own way.
Yuan convertibility is a bigger issue than officials let on. At a time when China would love to find a replacement for the dollar, its currency stance ensures the yuan won’t be it.
To internationalise its economy, China needs to encourage more overseas investment, reduce exports and promote sales of yuan-denominated debt by foreign companies. Instead, China wastes time devaluing its currency, adding to its imbalances and global ones. If it had any teeth at all, this would be an issue for the World Trade Organisation to tackle.
China is rightfully worried about fiscal irresponsibility in Washington damaging its vast dollar holdings.
Yet a weaker dollar is exactly what the world needs. Nothing would help more than a rebound in the $14.2 trillion US economy. Also, strength is being able to borrow in your own currency — not owning a mountain of reserves.
If China won’t act out of regional fairness, it should out of its own national interests. China’s stimulus and lending efforts are fuelling asset bubbles in stocks and real estate and creating the illusion of stable growth. Its largess may be paving the way for a bad-loan hangover.
It’s time for China to create a healthy economy; not one that is run on steroids, cannibalises jobs from neighbours or puts today before next year. Realising how much the yuan is at the core of all these problems would be a good start.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.