Washington, D.C.; Beijing, 09/11/2010
Rapid Renminbi appreciation could be ineffective and dangerous
China should not be the scapegoat for global imbalances
A strong yuan appreciation could hinder Chinese and global growth and cause interest rates worldwide to rise, according to a new Bertelsmann Foundation study. The report also warns that placing the burden for correcting trade imbalances solely on China ignores the more complex reasons behind large current-account surpluses and deficits, and threatens to aggravate an already-fragile global economy. Instead, the United States and Europe need to work with China, and all three powers should implement policies to correct imbalances that are of their own making.
The study, written by Stefan Collignon of the Sant’Anna School of Advanced Studies; Richard Cooper of Harvard University, formerly chairman of the US National Intelligence Council and chairman of the Federal Reserve Bank of Boston; Masahiro Kawai of the Asian Development Bank Institute; and Yongjun Zhang of the China Center for International Economic Exchanges, argues that the many origins of today's global imbalances mean an appreciation of the yuan alone would produce little benefit and could be counterproductive. The authors note that a much stronger yuan would depress Chinese exports and, subsequently, the availability of Chinese capital, which has helped keep interest rates low and spur growth. The US and Europe would be harmed by less Chinese investment. In addition, a significant appreciation of the yuan would:
* lower Chinese growth and, subsequently, global growth because China is increasingly the world's growth engine
* globally devalue the US dollar, causing US interest rates to rise and US stock prices to fall
* have no effect on the Chinese savings rate and other market distortions that keep Chinese production costs artificially low
Instead, the report urges that a combination of policies be undertaken by countries with large current-account surpluses or deficits. These policies include:
* raising the US savings rate by reducing demand based on credit
* re-orienting European countries with current-account surpluses from export-led growth to strengthened domestic demand with increased imports
* implementing Chinese structural reform and eliminating market distortions that keep wages and capital costs low
* strengthening Chinese social-security programs
* encouraging reserves to be held in currencies other than the US dollar
The authors of the study urge a controlled reduction of current-account imbalances to avoid higher unemployment, growing debt, protectionism and currency swings. They conclude that this reduction would best come about within the framework of an overall strategy encompassing and implemented by all the world's major economies. A strategy that focuses solely on the Chinese economy threatens a widespread economic turndown.
Rebalancing the Global Economy will be presented at a conference co-hosted by the Bertelsmann Foundation and the China Center for International Economic Exchanges at the Beijing Hotel in Beijing on 10 November 2010. This event is open to the media.