G-7 Steps Up Pressure On China on Currency
Saturday, October 20, 2007
Leaders of major industrialized nations yesterday called on China to let its currency appreciate rapidly, arguing that its current system of manipulating the value of its currency is causing distortions in the world economy.
The statement, from the finance ministers of the Group of Seven major industrial nations, contained the strongest words to date from the group in urging China to let the value of the yuan float more freely against the dollar and other world currencies. If that were to happen, its value would almost certainly rise, perhaps precipitously.
The group acknowledged that China has allowed its currency value to rise somewhat but said in the statement that "in view of its rising current-account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate."
Hours before the statement was released, Wu Xiaoling, the deputy governor of the People's Bank of China and one of its most powerful policymakers, said that while the nation wishes to liberalize its exchange rate policy, any rapid change would be dangerous because things could spiral out of control and potentially disrupt the remarkable economic growth China has enjoyed in the past decade.
"Maybe some of you in this meeting are not as patient as we are," said Wu in remarks at the Peterson Institute for International Economics in Washington, speaking through an interpreter. "If we risked things too much, that would hurt the Chinese economy and thus the world economy."
She argued for a gradual approach, comparing the rapid appreciation of the yuan that some Western economists advocate to the "shock therapy" approach to economic liberalization undertaken by post-Soviet states in the early 1990s that ended badly for many of them.
Speaking to reporters last night, Treasury Secretary Henry M. Paulson Jr. said China was making progress in loosening its currency trading system. But when asked about Wu's statement, he said, "I just happen to think there is more risk in moving too slow than too quickly."
The G-7 statement came in advance of meetings of the International Monetary Fund today, when the Chinese currency is expected to be at the top of the agenda.
A more valuable yuan -- and, by extension, a cheaper dollar, yen, and euro -- would make Chinese exporters less competitive. That is a major reason Chinese officials have been reluctant to stop intervening in currency markets to keep the yuan trading within a narrow range relative to the dollar.
In part because of that intervention, China sells vastly more to the United States and Europe than it buys. China's current account surplus, the total trade for goods and services, will be more than $400 billion in 2007, economists estimate, a massive figure both in absolute terms and relative to the size of its economy.
Economists argue that this distorts the world economy by putting U.S. and European companies that wish to sell to China at a disadvantage. Moreover they warn that the situation could pose a risk to the global financial system if the imbalances were to unravel too rapidly.
Paulson, like other leaders of industrialized nations, has been quietly meeting with Chinese officials on the currency issue. U.S. congressional leaders have been less subtle, threatening to enact trade barriers if the yen is not allowed to rise.
There are few indications that either approach has worked. "There have not been signs of response to G-7 requests for greater exchange rate flexibility," said Domenico Lombardi, president of the Oxford Institute for Economic Policy and a fellow at the Brookings Institution. "The G-7 have tried quiet diplomacy, but it doesn't work. They have tried loud diplomacy, and it doesn't work either."