What are you waiting for, Beijing?
Beijing's dangerous currency indecision
SCMP April 4
There is something unnervingly indecisive about the leadership in Beijing.
It scores quite well on rhetoric, giving the impression of nationalism on Taiwan
and Japan, and of steadiness on the domestic front. But, at least judging from
the issue of the currency and financial system, the soothing words and right
noises cannot hide the lack of willingness to make bold decisions.
It is all very well not to allow the yuan to be pushed around by
the US, which is in no position to lecture any country on fiscal
or monetary rectitude. America
must look to its own miserable savings rate if it wants to find a cure for
its trade deficit. But the Chinese government's failure to grasp the currency
nettle at any time over the past 18 months is clearly in evidence in the
lending excesses and localised property bubbles for which a hefty
price will have to
A more flexible currency policy has been accepted in principle for
almost five years. And China's economists are not unaware of the
dangers of maintaining a fixed link to a single currency which maintains
an interest-rate structure designed to inflate asset prices as the
way to sustain consumer spending. Yet nothing has been done. Somehow,
the time is never ripe for the decision by Beijing.
Recent administrative efforts to rein in credit have not been completely
ineffective, but there is almost no way that the central bank can completely
sterilise expansion of the monetary base caused primarily by the huge
external surplus. Nor can credit growth be controlled by market mechanisms
if interest rates are held at artificially low levels to sustain an
artificially weak currency.
President Hu Jintao and Premier Wen Jiabao may truly believe that
they are furthering stability by doing nothing, and that a weak currency
creates jobs. However, it is very hard to reconcile their currency
policy with the improved income distribution and anti-corruption drives
to which they have dedicated themselves.
Monetary excess leads directly to asset price bubbles, which create
a few instant billionaires, much city government corruption and ends
in the masses paying the price of enriching the few, via central government
bank bailouts. Furthermore, monetary excess inevitably increases regional
income disparities because the excess money mostly flows into more
financially developed regions such as Shanghai. The disparities are
further enhanced by the depth of corruption within the banking system.
The government is trying to address this, but in every country easy
money conditions go hand-in-hand with scams.
Rather than creating jobs, the weak currency policy appears to be
primarily benefiting foreign exporters and middlemen rather than local
workers. The labour shortages which are supposed to have arisen in
Guangdong can be directly linked to a failure to increase wages sufficiently
to lure workers from other provinces at a time when incomes elsewhere
have been rising.
A currency rise would translate into higher real wages at the expense
of exporters' margins. Given the competitiveness of Chinese industries,
it seems unlikely that export volumes would be significantly curtailed
by a stronger currency. Revaluation would raise domestic buying power
and hence stimulate local demand and employment, while deflating asset
Last year, China could claim that its external surplus was evaporating
as a result of high oil and other commodity prices, and the strength
of domestic demand. But despite continuing high commodity prices, this
year seems likely to see China record another massive current account
surplus and significant capital inflow.
The longer the delay in addressing the issue, the worse China's problem
becomes - and the longer the US can claim that its trade deficit is
anyone's fault but its own. Revaluation will help China, not the US.
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