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Countries should resist the temptation to engage in finger-pointing "“ a currency or trade war has no winners
As leaders of G20 nations converge in Seoul for their biannual summit, one of their biggest task will be to strengthen macro policy co-ordination, consolidate global economic recovery and promote strong, sustainable and balanced growth. The stakes are high. Leadership and the spirit of co-operation is what the world needs.
Some heavyweight economic commentators see a link between "manipulation" in China's yuan exchange rate and the global economic imbalances. Some call on China to allow its currency to appreciate substantially. The underlying assumption of these arguments is that yuan revaluation would help to redress global economic imbalances. Let me join the discussion by sharing the following thoughts.
There are basically three forms of imbalances. First, the imbalance between consumption and saving. Some countries borrow and consume too much, which was an important factor in the recent financial crisis. Second, the imbalance between the virtual and the real economy, caused by disproportionate expansion of the virtual economy. This has inflated an enormous bubble that was a leading cause of the financial crisis. Third, the imbalance in international trade, between the ballooning trade deficit of the US on the one hand and rising trade surpluses in the emerging economies of Asia, and in oil exporting countries. And there are imbalances in the development between the north and the south, imbalances in the international monetary system and international division of labour.
These imbalances can hardly be redressed by yuan revaluation, as called for by some politicians and commentators. We can look at some facts. The yuan appreciated by a total of 22% against the US dollar since July 2005 when China introduced exchange rate reform. Yet, according to the US department of commerce, 2005-2008 saw a growth of $65bn (£40bn) in the US trade deficit with China. The appreciation of the Japanese yen in the 1980s and 1990s did not do much to reduce Japan's trade surplus, either. Chinese exports are mainly low-value-added products, which are no longer produced in developed countries. Even if China stops exporting, other countries will assume this role over time.
Most of China's trade surplus is produced by western multinationals in China. Take the example of an Apple iPod made in China and sold at $299 in the US. Most of the profit goes to the American company and its employees and retailers, while the Chinese manufacturer receives only about $4 per iPod for its work.
Furthermore, although China has a surplus in the trade in goods, it has a deficit in the trade in services and in general trade. It has a surplus with the US and the EU, but a deficit with Japan, South Korea and the 10-member nations of the Association of Southeast Asian Nations. This shows that trade imbalances are not caused by the exchange rate, but rather are a matter of the globalised trading structure.
China is committed to the reform of its exchange rate system, which will proceed in a gradual and market-based manner and at a pace consistent with China's international balance of payments position. It would also be helpful for major importing countries to relax export controls on hi-tech products to China, as this hinders their ability to make full use of their comparative advantage.
Given the fragile and unbalanced global recovery, countries should resist the temptation to engage in finger-pointing or blame shifting. A currency or trade war has no winners. China contributed 50% to global economic growth last year and its continued growth is crucial to a steady global recovery. A one-off appreciation of 25 to 40% of its currency would be a major act of currency manipulation that would set back China's exchange rate reform and have a destabilising effect on the Chinese economy. This would do nobody any good. Co-operation is what matters. Both surplus and deficit countries have a responsibility to act to tackle the underlying structural imbalances in their economies, wherein lies the long-term solution.
China has, in recent years, made vigorous efforts to restructure its economy and boost domestic consumer spending. The recent fifth plenary session of the central committee of the Communist party of China reaffirmed China's commitment to build long-term structures to boost consumer demand and promote steady and fast economic development through the balanced growth of consumer spending, investment and exports during the 12th five-year plan period (2012-2017). China has also taken measures to improve public services such as healthcare, pensions and education to reduce the need for precautionary savings by the less well-off. This will, in time, release greater spending power by its population, which will have a significant impact on the world.
At the G20 summit, countries have a major opportunity to show to the world that they remain inspired by the spirit of co-operation that characterised the world's response to the immediate financial crisis and that they will work together on the basis of mutual benefit to tackle major challenges to the global economy. China will continue to engage in international co-operation and contribute to a successful summit at Seoul and faster global economic development.
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11 November 2010 5:14PM
Every time we kowtow to this desplicable corrupt murderous regime we disgrace ourselves.
11 November 2010 5:17PM
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11 November 2010 5:17PM
Dear Mr Xiaoming
The Chinese might fall for this propaganda but here in the west we won't.
If you wanted to help the west you would stop artificially devaluing your currency. And relax your import rules BUT Instead you make the same excuses.
sooner or later you will need the west's co-operation when you property bubble collapses. And guess what, they won't help you.
11 November 2010 5:19PM
Globalisation is of no benefit to most people in the West. The only people who benefit are greedy corporations. As you point out the assembly costs for an Ipod are tiny - Apple could easily build them in America if they wanted to.
You run your economy in the interests of your country. I don't blame you for doing that, in fact, in many ways I admire you for it. I blame the bankers and corporations and our treacherous political class for selling their own countries down the river.
David Cameron, on his visit to China, was asked by a Chinese student what he could learn from the Chinese. I thought he could learn to stop betraying his people, and act in the interests of his own country.
11 November 2010 5:31PM
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11 November 2010 5:48PM
@Senesino
1. I'm sorry about the actions of the British Museum, I promise to get a job there and become the director and stop them doing it.
2. You said that naughty word that starts with T. I don't agree with what you're saying, but you ought to have a right to say it. Your message will almost certainly be deleted very very fast.
11 November 2010 5:52PM
I am suprised that the Guardian published such transparent propaganda. China's childlike fear of the rest of the world is the real problem. China's threatening behavior and corrupting influence in the world is the only thing the world should be paying attention to. This article is intended to neutralize opposition to chinese economic and military actions by the western professional classes who read this newspaper. Even if Guardian editors feel their doing some kind of service to their readers by providing an outlet for the views of the chinese professional class on chinese policies they undermine the editorial independence of their paper. I will have to become increasingly sceptical about Guardian articles in the future..if I continue to read them at all.
11 November 2010 5:55PM
I agree no finger pointing at China. China will not be stupid enough to reply: We will bury you, like Nikita said a few decades ago. China has all the cards in its hand. and most of the reserves. So play the game carefully. Others can encourage other nations to tilt the balance of power to another country. But after seeing most of the products with 'made in China' in US and other countries, I wonder how things might improve for others. China must buy more and hope US is not selling only war material. We need clothes, TV, shoes, cars and computer, but less wars.
11 November 2010 5:58PM
OFF TOPIC WARNING:
This article is about the economy, please stay on topic.
11 November 2010 6:02PM
This article is a perfect example of why I not only purchase nothing made in China, but don't allow anyone on my property who has anything Chinese made. The fact we borrow money from them is a major reason I support starving the Federal Government of tax money and will side with pretty much most any group who advocates the same. On a final note, prior to WW2 China had a Government. Its not the same one t hat controls China today so these folks are nothing more than a fraudulent China, with the real China offshore.
11 November 2010 6:13PM
Countries should resist the temptation to engage in finger-pointing-----------
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