More Than Fortune Cookies

24 November 2004



China Resists Revaluation, Suggest America's Problems are Home-Grown

The Chinese dragon bared its teeth, albeit slightly and with a certain politeness, earlier this week when Deputy Governor of the People's Bank of China, Li Ruogu, spoke with the Financial Times. “China's custom is that we never blame others for our own problems,” he said. Then, he added, “The US has the reverse attitude, whenever they have a problem, they blame others.” Mr. Li, who was with Mr. Bush at the APEC summit in Chile, is right in what's wrong with America. One hopes he and the president got to spend a few moments discussing this. It might have been beneficial for both parties.

Mr. Li's remarks were in response to American requests that the Chinese revalue their currency, the badly named renminbi, to better reflect economic realities. Mr. Li defended the Chinese central bank's policy by saying that the Americans have structural problems in their economy that will not be resolved by a stronger renminbi relative to the dollar. He identified the real culprits in the US as high wages in low-value added industries. He further advised that the Americans “should give up textiles, shoe-making and even agriculture probably. They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.” Not if the numbers are accurate, not with out a huge change in the exchange rate, and not without a huge alteration of Chinese government policy about developing its own competing industries. However, high wages in low-value added industries is a real headache.

He also noted that the Chinese save 40% of their income while the Americans are much better at consuming, saving maybe 3%. Which in a global economy doesn't mean very much since the Chinese are the ones who invest their savings in . . . American government securities. American doesn't need to save so long as China is prepared to invest in the States. In the American political debate, such as it is on the subject, the concern is what happens to America when foreigners decide not to put their excess capital in the US economy. In China, though, there should be a complementary debate, what happens when China decides it doesn't want any more US T-Bills.

The value of Chinese-held American assets will plunge. The dollar will drop relative to other currencies, and the Chinese will either lose huge sums of money or hold their assets and lose even more as time goes on and the dollar continues to weaken. They are already in a position where value will be lost under any scenario. Beyond that, though, they can revalue and prevent sending good money after bad. But that doesn't seem to be Mr. Li's concern, “The best environment for us to gradually move towards a more flexible exchange rate is when people don't talk about it.” Chinese history is replete with examples of wishing problems away by refusing to talk about them.

Mr. Li's insights, though, into America's shortcomings are useful and most welcome. Criticism from friends is always a positive thing in the long run. And with that in mind, perhaps Mr. Li would rather discuss the persecution of the Falun Gong and Uighurs in China, the occupation of Tibet and the dreadful human rights situation in his homeland.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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