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China's best interest lies in adjusting foreign currency holdings
By Sun Lijian |
June 4, 2009, Thursday
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Print Edition
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US Treasury Secretary Timothy Geithner decided not to label China a currency manipulator in April and defended that decision just before his three-day visit to China that ended Tuesday. He said significant changes had taken place in China's exchange rate policy in the past two years.
That was in sharp contrast to his assertion in January that China was manipulating foreign exchange rates.
What drove Geithner's change of attitude is probably the US' urgency to rescue its financial market at the lowest cost possible.
Regardless of the interests of US dollar holders, the US might as well simply issue more money to save the market. But risks of inflation, the devaluation of dollars as well as capital outflow would all pose great threats to the US.
Therefore, for the US, the optimal market rescue plan is to borrow money, directly or indirectly, from countries holding large US dollar assets rather than issuing more money itself.
The direct way is to persuade the Chinese government that helping to save the US economy is one major measure to address its own economic crisis. The US has been continuously sending the message to China that despite short-term risks, China's huge accumulation of dollar assets may prevent long-term problems.
The indirect way is to win China over to support US dollar's dominant role in the international market.
As long as US dollars remain as the major currency in international trade and investment settlement, dollars are more likely to flow back to the US for the purpose of value preservation and appreciation.
That's why Geithner reassured the Chinese government in his speech at Peking University on Monday that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong US currency.
By comparison, the requirement for the marketization of the yuan exchange rate and further opening of China's capital market is of much less importance to the US.
However, to China, the premise for placing further confidence in the US market and the US currency is that the US keeps its policies transparent and that it effectively prevents the further deterioration of its economy.
Otherwise, it is not in the interests of China to stop the process of de-dollarization.
Rather, China should speed up the internationalization of the yuan and adjust the structure of the foreign currencies it holds. And this actually serves the interests of China in the long run.
China is endeavoring to climb up the value chain by encouraging independent innovation. It is also promoting industrial upgrading in some areas to help certain industries to achieve pricing power and to add value to the products and services they provide.
To better manage the fortune those industries create, a stronger financial system is needed, which would inevitably pose a challenge to the current dollar-dominant currency system.
Meanwhile, to ensure the sustainable development of Chinese economy and the steady growth of yuan assets, the nurturing of a domestic market and the growth of domestic demand are essential.
The good news is that the Chinese government is not over-stimulating domestic demand to compensate for the slackening overseas demand. This would naturally affect the results of the US market rescue plan to some extent.
That's why some American scholars have been advocating that China should expand consumer credits to stimulate its domestic demand.
However, such irrational consumption growth is the biggest lesson that the US subprime mortgage crisis has taught us.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
That was in sharp contrast to his assertion in January that China was manipulating foreign exchange rates.
What drove Geithner's change of attitude is probably the US' urgency to rescue its financial market at the lowest cost possible.
Regardless of the interests of US dollar holders, the US might as well simply issue more money to save the market. But risks of inflation, the devaluation of dollars as well as capital outflow would all pose great threats to the US.
Therefore, for the US, the optimal market rescue plan is to borrow money, directly or indirectly, from countries holding large US dollar assets rather than issuing more money itself.
The direct way is to persuade the Chinese government that helping to save the US economy is one major measure to address its own economic crisis. The US has been continuously sending the message to China that despite short-term risks, China's huge accumulation of dollar assets may prevent long-term problems.
The indirect way is to win China over to support US dollar's dominant role in the international market.
As long as US dollars remain as the major currency in international trade and investment settlement, dollars are more likely to flow back to the US for the purpose of value preservation and appreciation.
That's why Geithner reassured the Chinese government in his speech at Peking University on Monday that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong US currency.
By comparison, the requirement for the marketization of the yuan exchange rate and further opening of China's capital market is of much less importance to the US.
However, to China, the premise for placing further confidence in the US market and the US currency is that the US keeps its policies transparent and that it effectively prevents the further deterioration of its economy.
Otherwise, it is not in the interests of China to stop the process of de-dollarization.
Rather, China should speed up the internationalization of the yuan and adjust the structure of the foreign currencies it holds. And this actually serves the interests of China in the long run.
China is endeavoring to climb up the value chain by encouraging independent innovation. It is also promoting industrial upgrading in some areas to help certain industries to achieve pricing power and to add value to the products and services they provide.
To better manage the fortune those industries create, a stronger financial system is needed, which would inevitably pose a challenge to the current dollar-dominant currency system.
Meanwhile, to ensure the sustainable development of Chinese economy and the steady growth of yuan assets, the nurturing of a domestic market and the growth of domestic demand are essential.
The good news is that the Chinese government is not over-stimulating domestic demand to compensate for the slackening overseas demand. This would naturally affect the results of the US market rescue plan to some extent.
That's why some American scholars have been advocating that China should expand consumer credits to stimulate its domestic demand.
However, such irrational consumption growth is the biggest lesson that the US subprime mortgage crisis has taught us.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
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