China's G-20 Victory Rules Out Revaluation: Gordon G. Chang
Nov. 15 (Bloomberg) -- Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce, talks about the outlook for China's monetary policy and the dollar. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
The Group of 20 meeting in Seoul was a debacle in many respects. But it had a big winner: China.
This was the summit where the world was supposed to come together to unwind global imbalances. There are many of them at the moment, but the most important is China’s persistent trade surplus. This has led to the accumulation of foreign-exchange reserves of $2.65 trillion, a stash more than twice as large as any other country’s. The government in Beijing recycled its reserves into foreign markets, and this resulted in the excess liquidity that contributed to the global slump in 2008.
Chinese officials say they aren’t pursuing trade surpluses -- a point that Premier Wen Jiabao made in an interview with CNN’s Fareed Zakaria in September -- yet the nation continues to beat expectations with its trade numbers. In October, the surplus widened 13 percent compared with a year earlier.
The surprisingly large surplus seemed to give impetus to U.S. efforts to get the Chinese to release their iron grip on the value of the yuan. An obviously undervalued currency is, to a large extent, contributing to the surpluses. Yet the G-20 ultimately shied away from adopting meaningful measures to get China to float the yuan.
China adopted many tactics to deflect criticism at the meeting in Seoul, but one of the more effective was a pledge -- another one of them -- to spur domestic consumption as a means of increasing imports. President Hu Jintao last week outlined specific steps to get China’s citizens into the shops. He said the central government, over the next five years, would try to raise the minimum wage, increase consumer credit, adjust income distribution, and develop infrastructure, among other things.
Empty Promises
Hu’s list, though vague and lacking ambition, was a start. Yet Chinese leaders for at least a half decade have been promising to shift away from investment and exports and toward consumption, whose role in the economy has dropped from China’s historical average of about 60 percent to about 30 percent, one of the lowest rates in the world.
Statistics from the recent quarters show a similar decline. Closely watched urban consumption is increasing this year less than 1.5 percent in quarter-on-quarter terms, down from more than 2 percent in 2008 and 2009. So at a time when the economy is still expanding at a fast pace -- gross domestic product in the third quarter grew 9.6 percent -- consumption’s contribution to growth is stalling.
Common Sense
Analysts love to say that China is making the transition to a consumer-led economy. But such assertions aren’t consistent with the facts or common sense. The steps that the central government is taking to create trade surpluses -- such as holding down the value of its currency -- inevitably discourage consumption. The government’s stimulus program, which focuses on building infrastructure and industrial production, is also, by definition, anti-consumption.
The overriding reality is that consumption can’t become significant until Chinese officials, in fact and not just in words, abandon the current investment-led strategy. We need to recognize that low consumption is the inevitable result of China’s growth model, not merely a remediable feature of it, so consumption’s role won’t increase much until the government takes painful measures to change its approach.
What steps are needed? China will have to let the yuan float, permit banks to compete for deposits by offering market interest rates, allow labor to organize and demand higher wages, and provide a better safety net, especially in health care.
Risk-Averse Leaders
Model-changing is inherently risky, and Chinese leaders are especially risk-averse these days. Before a major transition, when the so-called Fourth Generation leaders are scheduled to give way to the Fifth at the end of 2012, China’s political system won’t be able to implement any radical plans.
The period of political paralysis won’t end when the Communist Party unveils China’s next supremo at the 18th Party Congress. It generally takes a new leader at least two years to consolidate his position. So the wrenching transition to a consumption-based economy is on hold until the middle of the decade. In the meantime, we can expect Chinese leaders to do all they can to maintain their control over the yuan’s value.
Will they be successful? In Seoul, Chinese officials managed to damp criticism of their distortive currency policies, so the pressure to liberalize is off for now.
After his 80-minute meeting with U.S. President Barack Obama last week, Hu said, in comments relayed by Foreign Ministry spokesman Ma Zhaoxu, the reform of his country’s currency required “a very sound external environment.”
We should realize that in the unusually benign post-Cold War period China didn’t undertake many of the changes that Hu has now promised to implement in the coming years. In those years, the external environment will be anything but sound, so we shouldn’t expect fundamental changes that he has eschewed in far less difficult circumstances.
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