This morning, the New York Times advised China to rebalance its economy, shifting it away from exports and toward domestic consumption. “Consumer spending amounts to little over a third of economic production, probably the lowest share in any country in the world,” the paper notes.
The Times is certainly correct in both its assessment of the current woes of the Chinese economy and its proposed cure. For years, American Treasury secretaries, Fed chiefs, and economists have been trooping to Beijing to tell China’s technocrats this. Everyone knows foreigners have been giving excellent advice, but China’s political leaders have been reluctant to accept it. Under intense outside pressure, in July 2005 they allowed their currency, the renminbi, to appreciate by permitting a “dirty float.” In other words, they allowed the yuan, as it is also known, to fluctuate in value within tightly managed trading bands. As a result, the Chinese currency has gone up in value. This year it has appreciated 7.3 percent against the dollar.
Then came July, when the gains against the dollar stopped. July is also the month that the ruling Politburo switched gears, dropping its fight against persistent inflation and starting a campaign to stimulate growth by promoting exports. Any program to help exports will inevitably depress imports and consumption. In short, China’s political leaders rejected the good advice from the New York Times months before today’s editorial saw the light of day.
And why do we care if Beijing is taking steps that will ultimately cause even more damage to its economy? By artificially depressing the value of their currency, Chinese leaders are trying to obtain a trade advantage by making their exports cheaper than they would otherwise be. In the past, China’s competitors–especially Thailand, South Korea, and Japan-took only minor steps to counteract Beijing’s currency moves by directly or indirectly fiddling with their currency values. In a time of synchronous economic failure, however, nations are bound to rethink the system of freely floating currencies. Just as bad currencies drive out good ones–that’s Gresham’s Law–selfish currency policies undermine responsible ones.
If Beijing persists in its irresponsible currency policy, other nations will stop being exemplary global citizens and begin to rig theirs as well. Competitive devaluations are one way to start a worldwide depression. At a time when almost every economy is fragile, leaders in the West need to tone down counterproductive calls for planetary regulation and begin speaking about the real danger to common prosperity.