The currency issue, to be sure, was just one of many reasons for bringing Jin Renqing, the Chinese finance minister, and Zhou Xiaochuan, governor of the People's Bank of China, together with Snow, Federal Reserve Board Chairman Alan Greenspan and their G-7 counterparts from Britain, Japan, Germany, France, Italy and Canada. A Treasury official said China would be invited to future meetings, though not yet as a full member of the group.
By many measures, China, still governed by the Communist Party, stands as an oddfellow in a group of developed democracies. Half of its 1.3 billion people depend on agriculture for a living, and its gross domestic product per capita is only slightly above El Salvador's. But it now ranks as the world's seventh-largest economy, and its rapid industrialization has been felt worldwide in rising commodity prices and the loss of manufacturing jobs.
Federal Reserve Chairman Alan Greenspan, from left, and U.S. Treasury Secretary John W. Snow greet Chinese Finance Minister Jin Renqing, and Zhou Xiaochuan, governor of the People's Bank of China, on Thursday.
(Dennis Cook -- AP)
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"For these meetings to regain any relevance, they need to bring in China -- the single most important engine of growth and agent for change in the global economy," Donald H. Straszheim, an economist at an advisory firm bearing his name, wrote to clients yesterday. "Every major company in the world, wherever headquartered, now sees China either as a threat, an opportunity or both."
But the urgency of the currency issue has put it at the top of the agenda for now. At stake is more than just the problem of cut-rate Chinese goods flooding into the U.S. market.
Many analysts think that because China's exchange rate is much lower than it would be if market forces prevailed -- estimates of the undervaluation range from 15 percent to 40 percent -- other Asian countries, notably Japan, South Korea, and Taiwan, have kept their currencies artificially low as well. This keeps their exports cheap, which has added to the woes of U.S. manufacturers and contributed to a record U.S. trade deficit. The deficit, at more than $500 billion a year, is itself a potential source of global financial instability.
The lack of a breakthrough statement by the Chinese at yesterday's meeting should not be taken as a sign that such gatherings are useless, according to Straszheim. "No one wants to look like a meeting with the big boys resulted in an arm-twisted concession," he said.
But a number of economists, including Goldstein, argue that the administration's approach is flawed. China should be pressed hard to simply raise the value of the yuan by 15 percent to 25 percent, they contend, rather than move soon toward floating the currency. Indeed, a floating currency would be dangerous for the Chinese economy if it were adopted too soon, according to these economists. That is because such a step involves easing the restrictions on the movement of money across the nation's borders, which in turn raises the risk of a financial crisis like the ones that swept through Asia in the late 1990s.
One important lever that has gone unused in prodding the Chinese is the International Monetary Fund, according to Goldstein, who used to be a high-ranking staff economist there. IMF officials have long urged China in public statements to move toward flexibility, the latest example coming this week when the fund's managing director, Rodrigo de Rato, said, "We think that precisely because it's a moment of strong growth in the Chinese economy, that this is a very good moment to do it."
Goldstein contended that the IMF should go beyond rhetoric and use its "special consultation" mechanism, which is intended for countries that are manipulating their currencies for commercial gain. Although special consultations cannot force countries to change their policies, it escalates the pressure on them to act. "But this is obviously something they [the IMF and its major shareholders, including the United States] don't want to do,' Goldstein said.
