The Great Yuan Debate

By Paul

Has China's Yuan Tinkering Changed the Global Economy? Debate between Nouriel Roubini and David Altig at Wall Street Journal Econlog.


“Here's the point: Unless China changes its exchange-rate policy, it will be impossible to control this unsustainable monetary, credit and investment boom.

Letting the currency appreciate will allow a soft landing in three ways:
• It will slow down the politically unsustainable growth of exports, as protectionist pressures are surging in the U.S.
• It will lead to less forex intervention and will thus slow down the rate of growth of credit.
• It will allow China to increase interest rates without having to worry that this increase would lead to even more capital inflows. Right now, China can't increase interest rates -- which needed to cool down the economy -- if it keeps its peg because more money creating inflows will occur if rates go up.

Thus, I predict that by the end of 2006 China will let its currency appreciate by at least another 5% relative to the U.S. dollar.…”


“That said, I think there is one big part of the picture you have not touched on, and that is precisely the state of financial-market development in China. My guess is that currency appreciation alone will do little to fundamentally resolve the imbalances that concern Nouriel and others. I believe that because I believe the crux of the problem has to with underdeveloped capital markets and the preponderance of credit allocation through a banking system lacking the controls expected of modern economies.

I would side with those who say exchange rate flexibility and a more robust internal financial system should go hand-in-hand, and are the prerequisites to broader reform and stability. I put special emphasis on the latter, and it appears to me that the slow pace of currency reform has a lot to do with Chinese determination to simultaneously implement a wide range of financial-sector reforms, of the sort that seem to arrive daily.”


Anonymous wrote:

china should appreciate its currency but at a slower pace than requested by americans/world, otherwise all its manufacturer workshops and factories would close down from the sudden change (change in bottom line calculation), where as the americans manufacturer would enjoy a heftier profit. this may sound good to the US but it would be short lived as most US companies have set up factories in china while exporting from china to other countries including their home (US), thus this leads to linked chaos and stock downturn. Not to mention it's unfair to ask that from china since the US never complained before when its war and excesses are (still) being paid by asian countries foreign reserves. Why do they resort keeping other ppls currency? it's to link asian currencies to US so as to create stability. Like they say in the business community stability is good whether in politics or currency (this is both). suddenly changing things is never good in politics or currency, look at russia and japan if you don't believe me.

If it's so wrong, then why not ask China to remove the peg AND it's reserve at the same time? btw the only reason Japan is not in deeper recession and its money is weak, is because it's indirectly pegging its currency to the US too, check out its US reserve and frequent intervention if you don't believe me. China will lead to japanese direction without it's sudden appreciation in my opinion.

-- October 19, 2007 11:10 PM

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