In a recent column, "The
right way to respond to China's exploding surpluses," Martin Wolf argues
...[T]he most important high-level dialogue in international economics ... is
the “strategic dialogue” between China and the US. ... This, to his credit, Hank
Paulson, the US Treasury secretary, has recognised. But his bilateral approach
will fail. ..
He also notes China's saving rate, argues it is too high, and
So what is to be done? The answer seems simple: save less and let the nominal
exchange rate appreciate faster, to eliminate possible inflationary consequences
of such a policy shift. The Chinese government can easily afford to spend more
on health and education ... [and] a modest pension system for those now alive.
Moreover, the bulk of Chinese savings are not by households but by the
government and corporations, many of which are owned by the government itself...
Savings then are a policy choice, not a given. At 50 per cent of GDP, they also
look far too high. ...
Mr Paulson is quite right to approach this question as a discussion of mutual
interests. But it is almost inconceivable that the Chinese will grant what will
appear to be one-sided concessions to demands from the “sole superpower”. That
would be far too humiliating. The Chinese will need, instead, to participate as
equals in a wider global dialogue... The obvious move is to replace the G7 with
a group of four – the US, eurozone, Japan and China. ...
Jagdish Bhagwati comments (comments are open links):
Jagdish Bhagwati: Martin Wolf may well be right. Bilateral talks rarely work
with big players, especially when the US wants the big players to do something
they do not want to do. This was the lesson the US learnt, and now seems to have
forgotten, in trying to impose managed trade targets on Japan, using Section
301, during the years of Japan-bashing.
But I also wonder what sense it makes for secretary Paulson, an enormous
improvement over his predecessor, to keep asking China for financial reforms.
That is something the Chinese must decide for themselves, in their evaluation of
their own interest. Why is Secretary Paulson so interested in this? One might
cynically think that it is part of what I have called the Treasury-Wall Street
complex: is what is good for Goldman Sachs also good for the US and, what is
more pertinent, for the world economy? I wonder.
Martin Wolf agrees:
Martin Wolf: Jagdish is right: too many US Treasury secretaries think they
are secretary for Wall Street. It is a mistake, I think, even politically. It is
certainly a narrow view of the US, let alone the global, interest.
Charles Wyplosz: Martin makes two important points: China’s current surplus
is driven by very high savings and the US cannot give orders ...
If savings is the problem, and it is, what good would a renminbi appreciation
do? There are some theories that exchange rate appreciation can reduce saving,
but the magnitude of the effect is, at best, minute. The inescapable conclusion
is that we should stop pestering the Chinese with calls for appreciation and
threats of designating them as currency manipulators... There is no doubt that the renminbi is not a free floating currency, but
there is no international obligation to let all currencies float. Maybe the
renminbi is somewhat undervalued, but that cannot be the ground for aggressive
diplomacy. If it is undervalued...,
all that will happen is real revaluation through inflation. Not a great idea, I
agree, but that is China’s problem. Let them make that choice as an independent
Much of this huge saving is invested locally, which largely explains one of
the most spectacular growth performances mankind ever witnessed... Not all of it
can be invested. ... So calling for Chinese firms to invest their savings is a
bit disingenuous. Sure, the government could spend more, especially on
infrastructure, health and social programmes. It is good to pass this sound
advice to the Chinese authorities, but then it is for them to decide.
In the meantime, what can they do with this mass of savings that cannot be
absorbed domestically? Invest abroad. Not in US Treasuries, but in profitable
corporations. This is what they just set out to do with the creation of the
State Investment Company...
Roland Vaubel adds:
Roland Vaubel: I agree with Martin that the Chinese are making a mistake. We
do not know whether China is saving too much. But we do know that China is not
investing its savings efficiently. The problem is not just that foreign exchange
reserves are low yielding assets. The Chinese central bank prevents the country
from importing capital on a net basis... However, an emerging economy like China
ought to be a net capital importer. In particular, it should not export capital
to capital-abundant countries like the US. It is this misallocation of the world
capital stock which economists should be concerned about.
China’s policy of offsetting private capital imports with official capital
exports may be viewed as an attempt to import foreign technology without
importing foreign capital on a net basis. Is China’s accumulation of foreign
exchange reserves merely the unwanted by-product of an export-oriented exchange
rate policy? Is it not also the deliberate but misguided strategy of a proud but
economically backward people to get hold of the technological achievements of
the West without becoming indebted to and dependent on it? The Chinese, or more
precisely their political leaders, want our technology but not our capital.
A small part of Andrew Smithers' comment:
Andrew Smithers: I agree with Martin that China is unlikely to accelerate
the rise in its nominal exchange rate because of external pressure. I suspect,
however, that this applies whether the forum for that pressure is bilateral
discussions with the US or multilateral ones including the EU. ...
Ronald McKinnon: Martin is wrong to emphasise one-sided saving adjustment by
China - or, I would add, other high-saving Asian economies... Attempts at
one-sided adjustment by East Asia will be frustrated unless American absorption
falls relative to income, ie, net saving increases. This is not a theoretical
proposition but comes from the balance of payments identity linking the national
income accounts on both sides. ...
To be effective, any international agreement must be two-sided. The US agrees
to reduce absorption by, say, raising taxes while the Asian countries do the
reverse. Such an agreement may seem fanciful and unlikely, but it is the only
way the global imbalance can be eliminated.
It would be a huge mistake to reach for the wrong variable, the exchange
rate, to solve the saving imbalance. Exchange rate changes have no predictable
effect on saving behaviour on either side. But exchange rate changes can still
be very destabilising in a macroeconomic sense. ...
And, Brad Setser:
Brad Setser: I agree with the core of Martin Wolf’s policy recommendation:
rather than holding the renminbi down and using policy to restrain domestic
demand, China should allow the RMB to appreciate and take policy stems to
stimulate domestic demand. ... So long as net exports are contributing so
strongly to growth, stimulating domestic demand risks true overheating, so
exchange rate adjustment seems to be a necessary part of the broader adjustment.
The argument that exchange rate changes won’t have an impact on savings/
investment gaps and thus won’t generate adjustment is an important one. However,
my read of the recent evidence suggests a bit more grounds for optimism that Dr
McKinnon's assessment. There do seem to be potential links between changes in
exchange rates and changes in the savings and investment balance. ...
Given the scale of China’s direct financing of the US (...Chinese purchases
of the US assets will finance about one-third of the United States savings
deficit), there also seems to be a rather direct channel through which changes
in China’s savings surplus would put pressure on the US to reduce its own