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Avoiding disorderly rise of yuan
By Jose Antonio Ocampo |
April 20, 2010, Tuesday
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TWO troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances.
Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will be 7 percent to 8 percent below its 2008 peak, while many countries, including industrial nations, are seeking to boost their current accounts.
Countries running surpluses must adopt expansionary policies and appreciate their currencies. But, while that implies that emerging-market currencies must strengthen, disorderly appreciations would do more harm than good. To use an American saying, it might mean throwing out the baby (economic growth) with the bathwater (exchange rate appreciation).
Consider China. Real appreciation of the yuan is necessary for a balanced world economic recovery, but disorderly appreciation may seriously affect China's economic growth by disrupting its export industries, which would generate major adverse effects on all of East Asia.
China needs a major internal restructuring from exports and investments, its two engines of growth in past decades, to personal and government consumption (education, health, and social protection in the latter case).
But this restructuring will tend to reduce, not increase, import demand, as exports and invest`ment are much more import-intensive than consumption.
Moreover, a sharp appreciation of the yuan could risk domestic deflation and a financial crisis. Chinese authorities certainly seem to have that interpretation of the roots of Japan's malaise in mind as they seek to avoid rapid revaluation.
The only desirable scenario, therefore, is a Chinese economy that transmits its stimulus to the rest of the world mainly through rising imports generated by rapid economic growth (ie the income effect on import demand), rather than by exchange-rate appreciation (the substitution effect).
This requires maintaining rapid growth while undertaking a major but necessarily gradual domestic restructuring, for which a smooth appreciation is much better suited.
Now consider other major emerging markets. Here currency appreciation is already taking place, pushed by massive capital inflows since the second quarter of 2009, and in some cases it can already be said to be excessive (for example, in Brazil).
These countries can, of course, resist upward pressure on their currencies by accumulating foreign-exchange reserves. The result is paradoxical: private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves.
The implication here is that relying on free movement of capital to achieve exchange-rate appreciation may generate a myriad of problems, including slower economic growth and the threat of asset bubbles.
(The author is a former UN under-secretary general for Economic and Social Affairs, and former Finance Minister of Colombia. Copyright: Project Syndicate, 2010. www.project-syndicate.org. The views expressed are his own. Shanghai Daily condensed his article.)
Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will be 7 percent to 8 percent below its 2008 peak, while many countries, including industrial nations, are seeking to boost their current accounts.
Countries running surpluses must adopt expansionary policies and appreciate their currencies. But, while that implies that emerging-market currencies must strengthen, disorderly appreciations would do more harm than good. To use an American saying, it might mean throwing out the baby (economic growth) with the bathwater (exchange rate appreciation).
Consider China. Real appreciation of the yuan is necessary for a balanced world economic recovery, but disorderly appreciation may seriously affect China's economic growth by disrupting its export industries, which would generate major adverse effects on all of East Asia.
China needs a major internal restructuring from exports and investments, its two engines of growth in past decades, to personal and government consumption (education, health, and social protection in the latter case).
But this restructuring will tend to reduce, not increase, import demand, as exports and invest`ment are much more import-intensive than consumption.
Moreover, a sharp appreciation of the yuan could risk domestic deflation and a financial crisis. Chinese authorities certainly seem to have that interpretation of the roots of Japan's malaise in mind as they seek to avoid rapid revaluation.
The only desirable scenario, therefore, is a Chinese economy that transmits its stimulus to the rest of the world mainly through rising imports generated by rapid economic growth (ie the income effect on import demand), rather than by exchange-rate appreciation (the substitution effect).
This requires maintaining rapid growth while undertaking a major but necessarily gradual domestic restructuring, for which a smooth appreciation is much better suited.
Now consider other major emerging markets. Here currency appreciation is already taking place, pushed by massive capital inflows since the second quarter of 2009, and in some cases it can already be said to be excessive (for example, in Brazil).
These countries can, of course, resist upward pressure on their currencies by accumulating foreign-exchange reserves. The result is paradoxical: private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves.
The implication here is that relying on free movement of capital to achieve exchange-rate appreciation may generate a myriad of problems, including slower economic growth and the threat of asset bubbles.
(The author is a former UN under-secretary general for Economic and Social Affairs, and former Finance Minister of Colombia. Copyright: Project Syndicate, 2010. www.project-syndicate.org. The views expressed are his own. Shanghai Daily condensed his article.)
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