Paul Krugman: The Chinese Disconnect

Senior monetary officials usually talk in code. So when Ben Bernanke ... spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. ... The crucial question, however, is whether the target value of the yuan is reasonable. ...

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

(from NY Times, October 22, 2009)

Chinese Central Bank Governor Zhou Xiaochuan Pledges Fast, Forceful Policies for China Growth

By Li Yanping and Luo Jun, published on Bloomberg.com, March 6, 2009

Chinese central bank Governor Zhou Xiaochuan pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening the nation’s economic slump.

“If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence,” Zhou said at briefing in Beijing. The central bank has “ample room” to fine-tune monetary policy after a record surge in lending in January, he said.

The central banker said he saw “signs of stabilization and recovery” in the world’s third-biggest economy, echoing Premier Wen Jiabao’s confidence that the nation’s 8 percent growth target for 2009 remains within reach. Collapsing exports because of the global recession have dragged growth to the weakest pace in seven years and cost the jobs of 20 million migrant workers.

“This isn’t the time to be cautious with the measures you roll out, it’s time to overdo it,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “The outlook for the global economy has deteriorated dramatically.”

The Shanghai Composite Index closed 1.3 percent lower on concern that the global recession is deepening. The yuan was little changed against the dollar as of 4:48 p.m. in Shanghai.

Premier Wen restated the 8 percent target in an annual speech to China’s parliament yesterday, the equivalent of a U.S. State of the Union address.

Slump in Confidence

Fast and forceful policies are preferable to “prevent confidence slumping during the financial crisis,” Zhou said.

China’s confidence contrasts with U.S. Treasury Secretary Timothy Geithner’s warning yesterday that his nation’s recession is deepening as it starts a $787 billion stimulus program of public works.

China’s official manufacturing index rose for a third month in February, from a record low in November. Initial public offerings of shares may resume, the nation’s securities regulator said today. Wen has cited growth in power output and consumption, loans and retail sales as positive signs.

Chinese banks doled out a record 1.62 trillion yuan ($237 billion) of loans in January and more than 800 billion yuan last month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday. The regulator plans to conduct spot checks of bank loan books to “ensure quality of growth,” Liu said.

Lending Quotas

Loans and money supply may have grown too quickly, Zhou said, after China cut interest rates, scrapped quotas limiting lending and pressed banks to support a 4 trillion yuan stimulus package. The jump in lending exceeded the central bank’s expectations, he said.

The government will study the results of its existing stimulus package before deciding whether to take any new measures, Zhang Ping, head of the National Development and Reform Commission, said in Beijing today.

The People’s Bank of China cut interest rates five times in the final four months of last year, including the biggest single reduction since the 1997-98 Asian financial crisis, leaving the benchmark one-year lending rate at 5.31 percent. There have been no cuts in 2009.

China needs “stable and relatively fast growth” to create jobs, boost incomes and ensure social stability, Premier Wen said yesterday.

Not everyone is convinced that China will meet its 8 percent goal.

Lower Growth Forecasts

The 6.8 percent gain in the fourth quarter was down from 9 percent for all of 2008 and 13 percent for 2007. The International Monetary Fund forecasts the economy will grow 6.7 percent in 2009, the least in almost two decades.

Economist Kowalczyk sees a 6 percent expansion this year and warns that surging unemployment may undermine social stability if the government fails to do more to boost growth.

China’s exports may have fallen 20 percent in February from a year earlier, the 21st Century Business Herald newspaper reported today, citing an unidentified trade official. Imports may have also fallen 20 percent last month, it said.

The nation’s trade surplus for February may be $7 billion, the newspaper reported. That would be less than a fifth of the size of January’s surplus.

“China’s economic conditions may appear less dismal than its Asian peers, but the government’s growth target of eight percent seems too optimistic,” said Sherman Chan, a Sydney- based economist at Moody’s Economy.Com.