LexisNexis(TM) Academic - Document
LexisNexis(TM) Academic - Document
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
July 23, 2005 Saturday
London Edition 1
SECTION: LEADER; Pg. 10
LENGTH: 571 words
HEADLINE: Long (un)winding road China points the way to dealing with global imbalances
BODY:
China's move to a more flexible currency regime opens the door to a serious international effort to tackle global imbalances and reduce the giant US current account deficit, now running at an annualised rate of nearly Dollars 800bn (Pounds 456bn). This is in everyone's interests. The US cannot borrow from abroad at this rate for ever, and the sooner the adjustment begins the less likely it is to end in global recession.
But on its own this week's move will have little impact. To make serious inroads into global imbalances, four things need to happen. China has to allow the renminbi to appreciate much further, other Asian currencies have to move in tandem, the US has to increase savings and the rest of the world has to boost domestic demand to compensate.
The initial 2 per cent revaluation will have no discernible effect. Calculations by Ken Rogoff and Maurice Obstfeld, two economists, suggest that the renminbi would have to rise by 20 per cent over two years as part of a broader adjustment to halve the US deficit.
Moreover, renminbi appreciation will have the desired effect only if other Asian currencies also rise. Otherwise lower imports from China would simply be replaced by higher imports from the rest of Asia. The Asian Development Bank estimates that if China alone revalued by 20 per cent the US current account deficit would improve by only 0.05 per cent.
Pan-Asian revaluation is likely. The priority for most Asian countries is
not to preserve a fixed rate against
the dollar, but to ensure stable Âintra-Asian exchange rates. However,
even a 20 per cent revaluation
by all Asian countries would not solve the US current account problem, though it would make a Âsizeable dent.
It needs to be Âaccompanied by changes to underlying patterns of demand.
As Asian currencies appreciate, their policymakers should stimulate domestic demand by lowering interest rates, raising spending and/or cutting taxes. This would increase imports and reduce surplus savings.
If and when this process gets under way in earnest, the US should move aggressively to increase its national savings, by raising taxes or cutting spending. Public finances have improved this year, but adjusted for the economic cycle, not much.
In the long run, to the extent that Asian countries allow their currencies to rise against the dollar they will have less need to intervene to buy dollar assets, putting upward pressure on US long-term interest rates. By reducing the government deficit, policymakers could offset the effect of this on the productive private sector.
There are risks in moving away from the old market equilibrium, which was stable in the short term, even if unsustainable in the long term. Abrupt reserve diversification by Asian central banks, or the fear of it, could trigger a sharp sell-off of US bonds and the Âdollar by private investors.
Conversely, expectations of future revaluation are likely to generate a wave of speculative capital flows into Asia. Currencies of countries with relatively open capital accounts could appreciate rapidly. If Asian central banks want to slow the rise, they may have to increase, temporarily, their purchases of US dollar assets.
Yet the risks of adjusting now are less than those of adjusting later. The best way to minimise the risks is to ensure the process does not get stalled half way - with limited adjustment in Asia and no response from the US. Alas, that seems all too likely.
LOAD-DATE: July 22, 2005
Copyright 2005 The Financial Times Limited
Financial Times (London, England)
July 23, 2005 Saturday
London Edition 1
SECTION: LEADER; Pg. 10
LENGTH: 571 words
HEADLINE: Long (un)winding road China points the way to dealing with global imbalances
BODY:
China's move to a more flexible currency regime opens the door to a serious international effort to tackle global imbalances and reduce the giant US current account deficit, now running at an annualised rate of nearly Dollars 800bn (Pounds 456bn). This is in everyone's interests. The US cannot borrow from abroad at this rate for ever, and the sooner the adjustment begins the less likely it is to end in global recession.
But on its own this week's move will have little impact. To make serious inroads into global imbalances, four things need to happen. China has to allow the renminbi to appreciate much further, other Asian currencies have to move in tandem, the US has to increase savings and the rest of the world has to boost domestic demand to compensate.
The initial 2 per cent revaluation will have no discernible effect. Calculations by Ken Rogoff and Maurice Obstfeld, two economists, suggest that the renminbi would have to rise by 20 per cent over two years as part of a broader adjustment to halve the US deficit.
Moreover, renminbi appreciation will have the desired effect only if other Asian currencies also rise. Otherwise lower imports from China would simply be replaced by higher imports from the rest of Asia. The Asian Development Bank estimates that if China alone revalued by 20 per cent the US current account deficit would improve by only 0.05 per cent.
Pan-Asian revaluation is likely. The priority for most Asian countries is
not to preserve a fixed rate against
the dollar, but to ensure stable Âintra-Asian exchange rates. However,
even a 20 per cent revaluation
by all Asian countries would not solve the US current account problem, though it would make a Âsizeable dent.
It needs to be Âaccompanied by changes to underlying patterns of demand.
As Asian currencies appreciate, their policymakers should stimulate domestic demand by lowering interest rates, raising spending and/or cutting taxes. This would increase imports and reduce surplus savings.
If and when this process gets under way in earnest, the US should move aggressively to increase its national savings, by raising taxes or cutting spending. Public finances have improved this year, but adjusted for the economic cycle, not much.
In the long run, to the extent that Asian countries allow their currencies to rise against the dollar they will have less need to intervene to buy dollar assets, putting upward pressure on US long-term interest rates. By reducing the government deficit, policymakers could offset the effect of this on the productive private sector.
There are risks in moving away from the old market equilibrium, which was stable in the short term, even if unsustainable in the long term. Abrupt reserve diversification by Asian central banks, or the fear of it, could trigger a sharp sell-off of US bonds and the Âdollar by private investors.
Conversely, expectations of future revaluation are likely to generate a wave of speculative capital flows into Asia. Currencies of countries with relatively open capital accounts could appreciate rapidly. If Asian central banks want to slow the rise, they may have to increase, temporarily, their purchases of US dollar assets.
Yet the risks of adjusting now are less than those of adjusting later. The best way to minimise the risks is to ensure the process does not get stalled half way - with limited adjustment in Asia and no response from the US. Alas, that seems all too likely.
LOAD-DATE: July 22, 2005
posted by Eastlaw at 12:51 AM
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