LexisNexis(TM) Academic - Document
LexisNexis(TM) Academic - Document
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
June 24, 2005 Friday
London Edition 1
SECTION: COMMENT; Pg. 19
LENGTH: 786 words
HEADLINE: China's currency is its own business SAMUEL BRITTAN
BODY:
Western statesmen have every duty to remind Chinese leaders of their still appalling human rights record - from the Tiananmen Square massacre to the occupation of Tibet and the continued veneration of Chairman Mao, who has been exposed as a killer on the level of Hitler and Stalin.
Unfortunately, they have gone quiet on these issues and have instead lectured the Chinese on the need to revalue the renminbi. It is not as if China were making a mess of its economy. On the contrary, it has a higher growth rate than any country in the Organisation for Economic Co-operation and Development. And, far from appealing for handouts from the west, it is one of the main sources of the financial inflows sustaining the US economy.
My "hands off the renminbi" view rests on general political economy grounds. Chinese economic policymakers may or may not be right in pegging their currency against the dollar and accumulating massive reserves. Some China watchers can find technical grounds to justify it, while others regard it as a diversion of resources that should be used to boost the living standards of ordinary Chinese. There is, in fact, a strong general case for allowing major currencies to float. But until the Chinese feel ready for this leap into freedom, any currency change would probably do more harm than good.
There is a high chance that a moderate increase in the renminbi parity would sooner or later be felt to be inadequate; and if the markets had seen the renminbi soar once they would know that it could soar again. A compromise sometimes suggested is a widening of the margins around the present or a new parity. This would not help if the margins were modest. For it would not take long for the market rates to come up against the ceiling or floor. But if the margins were extremely wide - like the 15 per cent on either side that surrounds the European Exchange Rate Mechanism, which theoretically still exists - the system would be a farce.
The history of the international currency system since the breakdown of Bretton Woods, when US President Richard Nixon severed the dollar's link with gold in 1971, provides a mine of evidence. After a period of unwilling floating, the main western countries tried to rebuild a system of "fixed but adjustable" exchange rates in the Smithsonian Agreement of 1973. But it did not take long before the dykes fell in, following another shift of sentiment against the dollar. Since then, critics of US policy have switched between arguing that the dollar is too strong and too weak - and indeed it has shown large fluctuations.
What the critics have not discussed is whether the movement of the dollar has been a safety valve that prevented far worse ills from besetting the world economy. The view that the dollar was too high led to the Plaza Accord of 1985, which was associated with a fall in the US currency. Whether this was due to the Plaza or the continuation of a trend, is still disputed by monetary historians. In any case, within a year and a half the worry changed to one that the dollar was falling too much and the Louvre Accord tried to shore it up. Around that time we saw the rebirth of schemes for target exchange rates with wider margins and easier parity revisions. But these were all swept away, following the Wall Street crash of 1987 and subsequent bickering among the summit countries. The currency crises that affected sterling in its period inside the ERM, and the euro strains now apparent, should be a caution about setting up another fixed rate system.
The renminbi issue is one aspect of the imbalances that are claimed to exist in the world economy. There is an international surplus of attempted savings that accounts for the supposed "puzzle" of low long-term bond rates. But within this overall savings glut, the English speaking countries, and especially the US and UK, save very little by historical standards, while east Asian countries and perhaps the eurozone save too much. A resolution of these imbalances would involve currency changes but who knows what they should be? Who would have thought that the British economy would have prospered for so long with a rate for sterling regarded as too high by most currency economists? If the savings behaviour at the root of these imbalances were to change, the currency corrections would take care of themselves. But if a partial stab were attempted - for instance, a move by the US and the UK alone to increase savings - then the results would all too likely be a depressive influence in the world economy too severe to be handled by bond rate changes. Meanwhile, the Chinese should be left to continue liberalising their financial system until they feel able to float the currency.
LOAD-DATE: June 24, 2005
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
June 24, 2005 Friday
London Edition 1
SECTION: COMMENT; Pg. 19
LENGTH: 786 words
HEADLINE: China's currency is its own business SAMUEL BRITTAN
BODY:
Western statesmen have every duty to remind Chinese leaders of their still appalling human rights record - from the Tiananmen Square massacre to the occupation of Tibet and the continued veneration of Chairman Mao, who has been exposed as a killer on the level of Hitler and Stalin.
Unfortunately, they have gone quiet on these issues and have instead lectured the Chinese on the need to revalue the renminbi. It is not as if China were making a mess of its economy. On the contrary, it has a higher growth rate than any country in the Organisation for Economic Co-operation and Development. And, far from appealing for handouts from the west, it is one of the main sources of the financial inflows sustaining the US economy.
My "hands off the renminbi" view rests on general political economy grounds. Chinese economic policymakers may or may not be right in pegging their currency against the dollar and accumulating massive reserves. Some China watchers can find technical grounds to justify it, while others regard it as a diversion of resources that should be used to boost the living standards of ordinary Chinese. There is, in fact, a strong general case for allowing major currencies to float. But until the Chinese feel ready for this leap into freedom, any currency change would probably do more harm than good.
There is a high chance that a moderate increase in the renminbi parity would sooner or later be felt to be inadequate; and if the markets had seen the renminbi soar once they would know that it could soar again. A compromise sometimes suggested is a widening of the margins around the present or a new parity. This would not help if the margins were modest. For it would not take long for the market rates to come up against the ceiling or floor. But if the margins were extremely wide - like the 15 per cent on either side that surrounds the European Exchange Rate Mechanism, which theoretically still exists - the system would be a farce.
The history of the international currency system since the breakdown of Bretton Woods, when US President Richard Nixon severed the dollar's link with gold in 1971, provides a mine of evidence. After a period of unwilling floating, the main western countries tried to rebuild a system of "fixed but adjustable" exchange rates in the Smithsonian Agreement of 1973. But it did not take long before the dykes fell in, following another shift of sentiment against the dollar. Since then, critics of US policy have switched between arguing that the dollar is too strong and too weak - and indeed it has shown large fluctuations.
What the critics have not discussed is whether the movement of the dollar has been a safety valve that prevented far worse ills from besetting the world economy. The view that the dollar was too high led to the Plaza Accord of 1985, which was associated with a fall in the US currency. Whether this was due to the Plaza or the continuation of a trend, is still disputed by monetary historians. In any case, within a year and a half the worry changed to one that the dollar was falling too much and the Louvre Accord tried to shore it up. Around that time we saw the rebirth of schemes for target exchange rates with wider margins and easier parity revisions. But these were all swept away, following the Wall Street crash of 1987 and subsequent bickering among the summit countries. The currency crises that affected sterling in its period inside the ERM, and the euro strains now apparent, should be a caution about setting up another fixed rate system.
The renminbi issue is one aspect of the imbalances that are claimed to exist in the world economy. There is an international surplus of attempted savings that accounts for the supposed "puzzle" of low long-term bond rates. But within this overall savings glut, the English speaking countries, and especially the US and UK, save very little by historical standards, while east Asian countries and perhaps the eurozone save too much. A resolution of these imbalances would involve currency changes but who knows what they should be? Who would have thought that the British economy would have prospered for so long with a rate for sterling regarded as too high by most currency economists? If the savings behaviour at the root of these imbalances were to change, the currency corrections would take care of themselves. But if a partial stab were attempted - for instance, a move by the US and the UK alone to increase savings - then the results would all too likely be a depressive influence in the world economy too severe to be handled by bond rate changes. Meanwhile, the Chinese should be left to continue liberalising their financial system until they feel able to float the currency.
LOAD-DATE: June 24, 2005
posted by Eastlaw at 8:57 AM
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