Treasury Chief Urged To Promote Shift in China's Economic Strategy
More exchange-rate flexibility unlikely to affect trade imbalance, experts say
By Andrzej Zwaniecki
USINFO Staff Writer
This is the second in a two-part series of articles on the U.S. treasury secretary's trip to China.
Washington -- U.S. Treasury Secretary Henry Paulson should encourage Chinese leaders during his trip to Beijing to
change their economic strategy in order to sustain strong growth and achieve more balanced trade with the United States,
private-sector experts say.
Paulson, U.S. Trade Representative Susan Schwab and several other top-level U.S. officials, including the head of the
U.S. central bank, will visit China for the inaugural December 14-15 session of the U.S.-China Strategic Economic
Dialogue. Paulson and other senior U.S. officials have indicated that the huge U.S. bilateral trade deficit with China
is a major U.S. concern. In an editorial published in the December 11 issue of the Washington Post, the treasury
secretary said the United States believes China can do more to reduce its trade surplus. (See Paulson byliner .)
U.S. Trade Representative Susan Schwab said in an editorial printed in the December 11 issue of Financial Times that
both countries' trade policies "can help reduce the imbalance to the extent it arises from closed markets or unfair
trade practices."
Economic researcher and China expert Nicholas Lardy told USINFO November 30 that China must change the current pattern
of export-driven growth, which has created huge savings and fueled large investments, to address the current account
surplus.
A country runs a current account surplus when its savings exceed its investment.
"The Chinese need to save less in every sector and introduce reforms that would encourage more consumption," Lardy, a
senior fellow at the Peterson Institute for International Economics, said.
Adopting relevant policies can help China sustain fast growth, accelerate job-creation and drive other positive economic
developments, he said. It also can help it balance trade with the United States.
Lardy said steps taken so far by China have been quite timid and "have not yet bore any fruit." "I think this should be
a focus of discussions in Beijing, not the exchange rate," he said.
CONTROVERSY ON EXCHANGE RATES
U.S. manufacturers, however, blame China's policy of keeping its currency -- the yuan -- at an artificially low level
for undermining their competitive position and creating a more than $190 billion trade deficit in goods on the U.S. side
in the first 10 months of 2006.
At a December 4 meeting, members of the National Association of Manufacturers urged Paulson and other U.S. officials to
get tougher with the Chinese on their exchange-rate policy and other trade issues such as government subsidies and
widespread piracy of U.S. intellectual property, and to do so soon.
Paulson has called on China to move to a "more flexible, market-driven exchange rate" to achieve stable, sustainable,
and noninflationary growth and cautioned that its current exchange-rate policy increasingly is viewed by its critics as
a symbol of unfair competition.
But the treasury secretary de-emphasized the possible impact of a more flexible exchange-rate policy on current account
imbalances.
Economic researcher and China expert Albert Keidel said many economists believe the exchange rate is "almost" irrelevant
to the current account deficit.
"A stronger yuan would not solve the problem of U.S. trade deficits," Keidel, a senior associate at the Carnegie
Endowment for International Peace, told USINFO November 30. "If Chinese goods became more expensive, investors would
switch to suppliers in other countries, and America would import the same goods from those countries rather than produce
them at home."
Keidel also said U.S. bilateral trade deficits have been decreasing with a number of Asian trading partners that now
finish their exports to the United States in China; total U.S. imports from East Asia have increased minimally since
2000.
LIBERALIZING CAPITAL MARKETS
Most economists share Paulson's view that China will not have a fully flexible market-based exchange-rate policy until
it has competitive capital markets working within an open financial system.
In his December 11 editorial, Paulson, a former head of investment giant Goldman Sachs, said opening equity and bond
markets would help China attract investment and "allocate resources to their most productive uses."
Lardy said China's leaders recognize that fact. In recent years, they have instituted "very substantial reforms" in the
financial sector such as improved regulatory and prudential standards, partial liberalization of interest rates,
sizeable write-offs of bad loans and enhanced governance at the largest state-owned banks.
However, China's leaders believe further down the road they will face some serious constraints and shortcomings,
including the slow pace of securities firms' restructuring and insurance industry's reform.
"They are working on these issues but they probably feel they are going as fast as they can," Lardy said. Paulson said
the greatest danger for China lies not in implementing reforms too quickly, but in not implementing reforms quickly
enough. (See related article .)
See also "High-Level U.S.-China Talks Focus on Medium-Long-Term Gains." For more information on U.S. policies, see The United States and China .
ENDS