Bill Emmott - International Author & Adviser

Article

China´s currency
The Times - September 21st, 2009

An economic crisis that began as a drama, or even a tragedy, is descending into farce. It is bad enough at home, what with Labour and the Tories arguing over whose spending cuts are going to be the nastiest, when the real issue is what it will mean for Britain to have a budget deficit that might reach 15% of GDP next year. Abroad, however, things are taking an even more absurd turn, with the world´s two supposedly most important countries, America and China, descending into a trade row about Chinese car tyres and American chickens.

            Moreover, we are entering a packed season of international summitry, with the "Group of 20" countries meeting in Pittsburgh this week to put the world to rights in a trendily broad and inclusive way, just ahead of the annual meeting of the International Monetary Fund in Istanbul. But what are they planning to do? They will be talking mainly about bankers´ bonuses. They will do so in a format seemingly designed to prevent proper thought or decision-making, or at least long speeches from Nicolas Sarkozy and Gordon Brown: the world´s mightiest heads of government will be meeting for just a dinner and a morning, giving them about five minutes each to get their points across.

            Amid this international comedy, the most important topic in international economic policy will be one that will not be discussed at all, either in private or in public. The silence on this vital issue can partly be explained by the fact that it is complex. Mainly, however, our global leaders will be silent for an unfunny but alarming reason: in order to avoid offending one among their number: China.

            At this point in articles such as this, about the importance of unspoken issues, it is traditional to cite a literary analogy: typically,  Sherlock Holmes and his dog that didn´t bark; or Oscar Wilde, and Lady Bracknell´s exhortation to her niece to "omit the chapter on the rupee—it is somewhat sensational". Readers should feel free to insert their own preference. But the rupee might in fact be the more apt. For the subject about which our leaders will be silent is that of the Chinese currency, the Renminbi, which is also known as the yuan.

            This issue is vital because the big background to today´s economic crisis is the unbalanced nature of the global economy. For the past decade or so, Americans, Brits and some other Europeans have consumed and borrowed beyond their means, running up big balance of payments deficits, while China, some other Asian countries and the oil producers of the Arab world have consumed too little, saving far more than they were spending and running up vast balance of payments surpluses.

            Their capital exports provided the great flood of money, the financial equivalent to the European wine lakes of yore, which swept along the credit boom and the disastrous manoeuvres of our western banks. Thanks western self-flagellation, it is common to see this as a long-term phenomenon, sign of our decadence and decline. But in reality it was the creation of just the past ten years, following the previous big financial crisis, in East Asia, which convinced China and many others to keep their currencies pegged low, to build up big current-account surpluses and as a result to build up vast foreign-exchange reserves—in China´s case $2 trillion-worth, much of it held as dollar securities.

            That, along with the domestic politics of preserving trade-union backing for President Obama´s health-care reforms, is also the background to last week´s trade row about tyres and chickens. That is the American response to unbalanced trade: to threaten protectionism against imports from China made artificially cheap by the rigged Renminbi. The Chinese response, beyond crying foul about fowl, has been to try to divert the world´s attention by claiming that the dollar is the real problem, along with its "hegemonic" role in global reserves. But this need fool no one except Hugo Chavez and Vladimir Putin. The real problem is the Renminbi.

            China is the world´s largest exporter and its third-largest economy. Yet among the top economies it is the only one whose currency is not freely convertible, ie with a price mainly set in the markets. From mid-2005 until late 2007, China did gradually revalue the Renminbi against the dollar by about 15%. But since then the appreciation has stopped. And as the dollar has been weak against the euro and even the pound, the Chinese undervaluation against those currencies has got worse.

            There has been a lot of waffle since the crisis began about the need to get Chinese, German, Japanese, Malaysian, Arab and many other high-surplus countries to consume, and hence import, more. But the one measure that would stand a chance of making a difference—the floating of the Renminbi—has been taboo ever since the American Treasury Secretary, Tim Geithner, caused outrage in Beijing by describing it as "manipulated" in his Senate confirmation hearings. The truth often hurts.

            It is time, surely, to end the silence over this topic, which is the one big global macroeconomic issue that really matters. With Chinese convertibility, a lot of other Asian countries that have pegged their currencies to the dollar in order to remain competitive in and with China, would then also be stirred to change their approach.

            Could it happen? Most China-watchers assume it will take ten years or more. I disagree. It could be done in three, at the most. For China at last has an interest in changing its currency policy too: first, because of its problem in facing up to the currency risk on those $2 trillion of reserves; second because, thanks to its huge domestic stimulus package, it faces a real risk of inflation; third, because its leaders know (and regularly say) that Chinese industry and the Chinese economy needs to move upmarket, out of low-cost car tyres and into higher (and cleaner) technologies. The chapter on the Renminbi has become too sensational to ignore.

Bill Emmott was editor of The Economist in 1993-2006 and is the author of "Rivals: How the Power Struggle between China, India and Japan will shape our next decade"


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