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.
Roubini;
“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.…”
Altig;
“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.”
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