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Monday, February 21, 2011

MORE ON HOW CHINA'S UNDERVALUED CURRENCY AND OVERHEATED ECONOMY ARE DESTABILIZING THE GLOBAL ECONOMY

The Commentary That Follows Is Taken From the Globe&Mail

A well-known Canadian newspaper, the Globe&Mail sent a journalist to Paris this last weekend, where the latest G-20 meeting of the major economies in the world gathered for a discussion and their representatives engaged in limited negotiations, most of them frustrated by Chinese resistance to their complaints about that country's two related problems: its cheap currency tied to the $US, and its roaring overheated economy. 

As a result of the blasting Chinese GDP, the prices of global commodities --- food, minerals, energy --- have soared, causing additional problems for global recovery outside China besides its unparalled multilateral current account surplus --- almost $200 billion in 2010 ($273 billion with the USA alone).  In the EU and elsewhere, not to mention in China itself, a further result has been the renewal of inflationary pressures that may force  central banks to raise interest rates at a time of a slow, perilous recovery.  The USA, please note, is an exception: its GDP growth rate has returned to pre-recession performance, yet inflationary pressures are very limited . . . with the major problem that we face, a serious one,  a slow and disappointing reduction in our high unemployment rate: still over 9.0% 38 months after the Great Recession began, and 18 months since it officially ended.

Complaints About China's Cheap Currency

At the G-20 meeting, it wasn't just the US and the EU countries that complained about China's undervalued Yuan (called the Renimbi for foreign trade) and its disruptive fall-out world-wide.  India and Brazil, two fast-growing emerging economies, maintain floating exchange rates, and their representatives voiced vigorous criticisms of the unfair competition that China's cheap Yuan cause for their own exports.  On this score, the best criticism was voiced by the French finance minister:

"That can't go on too long," French Finance Minister Christine Lagarde, the host of the summit, said of China. "As is often the case with big imbalances, a system collapses."

Note though

In an unusual move that prof bug hasn't know about --- this, even though he and his wife watch the daily news out of Paris carried by the French-speaking deuxieme channel, which reported extensively on the G-20 meeting ---the Chinese representative did agree to better monitoring of global currency imbalances and somehow prevent a country like China from rolling up huge amounts of foreign currency like dollars, Yen, and Euros.  True, the mechanism for "preventing" such lopsided currency-exchange rates that --- together with unusually low domestic consumption and hence uniquely high savings rates (in China's case, consumption at a staggeringly low 36% of GDP!) --- cause these huge global imbalances .  Is the agreed-upon compromise just so much hot air then?  Hard to know. 

Oh, by the way, the rate of national consumption in Japan and Germany, which also rely heavily on export-led economic growth, is about 20% higher as a percentage of their GDP's.  And the Euro and the Yen have been freely-floating against other currencies, including the $US, for years now.

Click on the Continue-Button below.

One thing for sure   

Inflation is galloping along in China at around a 10% rate now, courtesy of the overheated economy.  The fast buildup of the prices  of goods for both households and business firms threaten to get out of control unless the Chinese authorities manage to do the following:

  1) reign in vigrously the high levels of private and public debt ---- especially in the state-owned or controlled banking system;

  2) raise interest rates far faster than they have been doing recently;  

  3) and the sooner, the better, raise the Yuan's value at least 20% or more as an anti-inflationary policy that would reduce the prices inside China of imported commodities, manufactured goods, and foreign services. 

That's for the Short-Run.  In a Wider, Decade-Long Period,

There looms the need for a thoroughgoing restructuring of the Chinese economic system.

Which means what?  Tersely put, a  country with 1.3 billion people ---- about 300 million of them living in wretched poverty, and another 300 million or so poor peasants ---- will have to switch its export-driven rate of economic growth away  from its over-reliance on foreign trade and on high rates of often wasted investment by the government, state-banks, state-firms, and private-firms . . . and rely instead  much more on  household consumption as the major engine of GDP growth. That switch won't be easy.  It would require vast changes in current Chinese economic structures and policies, among them:

  • An end to financial repression: artificially low interest rates, controlled by the Central Bank and state-owned or state-controlled banks, that privilege export-oriented business firms with cheap investment capital while maintaining limited credit-opportunities to households for buying durable goods.  And along with raising interest rates and extending credit to households, the dismal low-rates on household savings in the banking system would have to be increased as well.

 

  • The provision by the government of a social security pension-scheme and health-care: either fully state-run or a mixture of public and state-regulated private insurance.   Right now, the lack of such provision is a major causal influence on the soaring rate of national savings: almost 46% of GDP.
 
  • A 20% to 30% revaluation of the Yuan nominal currency rate of the Rmb (Rmb) against the $US,.  A freely floating rate would be ideal, but it would probably choke off fairly quickly a huge chunk of China's  trade surpluses. . . even as, additionally, over time,  a freely floating  Yuan would probably lead numerous  foreign business firms in China to return to their home-base or move their production elsewhere to other countries.   

  

  •  A much greater focus on China's environmental problems.

  

  • And policies, involving government investment and subsidies to private businesses, to deal with the country's huge regional imbalances in per capita income, along with a concerted program to reduce poverty . . . mainly by creating more jobs in the cities and towns in the interior and the north of the country, above and beyond the provision mentioned a moment ago of a social security network.