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Warum die Chinesen stärker mitreden sollten

23. Oktober 2007

Der Streit zwischen China und den G7-Staaten um die Wechselkurse wird schärfer. Grund genug, den Chinesen mehr Gewicht in internationalen Organisationen wie dem IWF zu geben.

The monetary controversy between China and the Group of Seven is heating up. On 8 October, the euro area finance ministers moved closer to the US position and announced that a mission would be sent to Beijing to push for a revaluation of the renminbi (RMB). On 19 October, the Group of Seven pointed a finger at China and stressed ‘the need to allow an accelerated appreciation’ of the RMB. Meanwhile, no less than three different bills are under discussion in the US congress. If adopted, all would instruct the US administration to move onto the offensive, draft in the International Monetary Fund, and initiate a case against China in the World Trade Organisation.  

It is the first time since the disputes over the exchange rate of the yen in the early 1980s that monetary controversies have reached such a pitch. It is the first time ever that they have involved a still very poor country. And it is the first time that the incumbent powers, the US and Europe, have joined forces in an economic dispute with the rising power, China. This raises four questions: first, is the RMB undervalued? Second, does it matter? Third, where can the monetary battle lead to? And fourth, should the Europeans participate in it?

On the first point, the evidence is overwhelming. By any reasonable standard, the Chinese currency in significantly undervalued. In spite of growth in excess of 10% per year, the country’s external surplus is forecast to reach 12% of GDP in 2007 and more than 1000 billion US dollars have been added to its exchange reserves in less than five years. It is therefore not surprising that almost all available studies indicate that the RMB is undervalued by a wide margin – at least 20%. The Chinese government actually does not dispute the need for an appreciation and in 2005 it introduced a new exchange rate regime with a dose of upward flexibility. The only thing is that appreciation vis-à-vis the dollar is proceeding at a snail’s pace, while the dollar is itself depreciating. Against all currencies, the RMB has only appreciated some 3-5% (depending on indices) since the introduction of the new regime. It is not even clear whether the gap between its current and its equilibrium value has narrowed.     

The second question is more difficult. Capitol Hill’s quick fixers call for an appreciation of the RMB in order to stifle competition from low-wage China and save American jobs, but Chinese costs primarily result from its low level of development and the existence of a reserve army of hundreds of millions of poor, underemployed peasants eager to move to the cities as long as they can get a job at any wage above the subsistence level. In this regard China perfectly illustrates what Nobel prize winner Arthur Lewis once described as development with an unlimited supply of labour. So what would a currency appreciation change? Can a real disequilibrium of this sort be remedied by a change in the exchange rate? Wouldn’t it simply be offset by wage cuts? 

The answer is that it depends on the other policies that might accompany a revaluation. Since Deng Xiaoping’s decision to open up to foreign direct investment in the 1980s, the Chinese economy has nurtured a whole panoply of distortions – from special tax status to access to finance –  in favour of the export sector. The undervalued exchange rate is just one of them. A revaluation by a significant amount – say 10 or 15% – would in the short run dent demand to the export sector as, even in a very flexible economy, it would take some time to absorb it. This would give the government an incentive to remove the regulations that hamper development in the other sectors. This would also lead it to support domestic demand through fiscal policy and the creation of proper social insurance, which in turn would contribute to reducing the external surplus. Therefore, although a revaluation would not remove the Chinese worker from the world trade map, a large enough one would probably act as a trigger and favour a more balanced pattern of growth. This would in the end be in the interest of China.  
Thus the US and Europe have a point. But they have not been successful so far, and megaphone financial diplomacy has no guarantee of succeeding. The Chinese are cautious, because shock therapy is not part of their strategy (they had enough of it in the past) and because the export lobby has political clout domestically. So pressure is mounting and there is a chance that in the run-up to US presidential elections, martial rhetoric will develop. The scenario envisaged in the congressional bills is a high risk one, because the bills would imply co-opting the IMF at the very time the institution is looked upon with suspicion by the emerging world – not least by Asia. They would also imply breaching a post-war taboo and entering the unexplored money/trade linkages territory. Again, this would be a hard call at a time the WTO is at risk of not being able to complete the Doha trade negotiations. In other words, what is worrying in the crescendo of the currency dispute is that the multilateral system may not have the legitimacy and strength it would need in order to arbitrate between major powers – if it ever did.

So what role are the Europeans playing in this game? They have, in fact, little choice. Contrary to common perception, the Chinese exchange rate is as important for them as it is for the US. Furthermore, they are at risk of seeing their currency play the part of the adjustment variable in the global exchange rate rebalancing act. They cannot afford to remain bystanders. On the RMB, they can try tactics of their own but in substance there are no grounds for having a position that differs significantly from the US one.

Where they can make their voice heard is on the role of international organisations, which they have every interest in preserving from harm. This does not imply keeping these organisations away from disputes, but making sure they are in a position to serve as legitimate mediators and arbitrators. To this end, however, the Europeans would be well advised to recognise that they need to cede a portion of their seats and votes at the IMF to China and the other emerging powers. The rise of currency disputes is a reminder of the usefulness of the IMF – but also of the need for an IMF in which all countries are fairly represented.          

Von Jean Pisani-Ferry

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