The story in the US right now is pretty much
subprime all time; so much so that even China seems to have been placed on the
backburner. It's a shame as yesterday and today's Senate Committee on Finance
hearings on "Risks and Reform: The Role of Currency in the US-China Relationship" have yielded a bumper crop of insights. Threateningly for US-China relations, China's perceived inaction by the Senate on currency reform is under scrutiny once more. Senators Charles
Schumer (D-NY) and Lindsey Graham (R-NC)--who last year sponsored a bill proposing 27.5% tariffs on Chinese imports as a "a shot across the bow" that was not intended to pass--have now
teamed up with Max
Baucus (D-MO) and Charles
Grassley (R-IA) in building the perfect legislative beast:
Beijing and the Bush administration are both on notice that Congress will pass bipartisan, veto-proof legislation this year aimed at forcing China to allow its yuan currency to continue to rise against the dollar, two of China's most vocal critics on Capitol Hill vowed Wednesday. Rather than serve as "an apologist" for China, "I hope the administration will join this team," Sen. Lindsey Graham, R-S.C., told reporters after testifying before the Senate Finance Committee in the second hearing on China's economic and currency policies in two days.
They remain (purposely?)
vague on how this bill would look like other than that it would be
WTO-compliant and would garner enough congressional support to override a presidential veto, or a two-thirds majority in both houses of Congress. While we await the details of this piece of legislation, let us consider the statements of the star-studded witness panel featured on Wednesday...
Stephen Roach, chief economist of Morgan Stanley,
repeated the now-familiar mantra of "don't bite the hand that feeds." At the start of his testimony, he suggested that currency was not the only or even the most important source of Chinese competitive advantage. He posed the question: "How would you feel if you got your way on the Chinese currency adjustment but found after three or four years the pressures bearing down on US workers had only intensified?" As a skeptic of currency adjustment as cure-all, he said "I don't buy the notion that China's currency policy is a threat to the global trade. I feel, instead, that many in the developed world--especially the saving-short United States--are treating
RMB-related issues as scapegoats for their own macro shortcomings." Ouch. He reaffirmed his (politically unpopular) view by concluding that the US would do better if it considered its own role in creating such a massive trade imbalance. Roach added that a pro-saving agenda would top the list in taming the budget deficit and in pursuing tax reforms which could "alter the personal price between savings and consumption."
As for China, Roach stated that it should move away from excess reliance on investment and exports for its growth and embrace more of a pro-consumption model. Doing so would avoid capacity excesses (by creating internal demand) and protectionist risks from elsewhere. Also, Roach believed it could partly move China away from energy- and pollution-intensive growth, though it would still need to address its serious and growing environmental problem separately. The rest of his statement is interesting in noting China's environmental challenges, and I would invite you to read it if you've got the scratch. There's little new here, though it's odd that he did not necessarily see
RMB revaluation as being part of the reform equation.
Eswar Prasad of Cornell and late of the IMF also
testified. Being an ex-IMF man, it is no surprise that while he saw revaluation as part of the process of reform, he prioritized financial deepening ahead of it. According to him, "the lack of financial market development and the general increase in macroeconomic uncertainty has made households nervous, increasing their savings to very high levels and restraining consumption growth." As I pointed out
earlier, though, many obstacles have been placed in the way of foreign financial service providers who could offer more sophisticated services to Chinese consumers. Nevertheless,
Prasad affirmed that the costs of China maintaining its current FX regime outweigh the benefits of moving to a more realistic exchange rate. He offered the following diagram on p. 4:
If China moved to a more flexible exchange rate, it would gain monetary policy independence by not having to gear this policy to keeping the yuan artificially weak and be further able to open its capital account in promoting financial deepening. In short,
Prasad suggested that China move from having an inflexible exchange rate and (largely) free capital flows at the expense of a sovereign monetary policy to giving up an inflexible exchange rate and gaining free(er?) capital flows together with sovereign monetary policy. Classic
Mundell-Fleming "
impossible trinity" stuff. Further along this
yellow red brick road are the aforementioned gains to macroeconomic management and financial deepening, which in turn lead to balanced and sustainable growth. Though the diagramming is undoubtedly idealistic, I subscribe to this view most closely among the four presenters: "currency flexibility is an essential but hardly sufficient [Chinese] policy priority."
Morris Goldstein of the Institute of International Economics was third to present. He was, by far, the most
gung-ho of all four. In contrast to the gradualist Roach, he said "China should deliver a meaningful '
downpayment' of a 10-15% appreciation of the
RMB from its current level. Because China has waited so long to take decisive action on the growing undervaluation of the
RMB, the undervaluation can no longer be eliminated in one go." He then cited four indicators as to why China had to move--its "mushrooming" CA surplus, its real exchange rate which he said had actually depreciated 2% against the dollar since 2001, its unwillingness to let market forces determine the (nominal) exchange rate, and its rejection of claims on currency manipulation--which membership to the IMF forbids. In contrast to
Prasad,
Goldstein suggested capital account liberalization should follow exchange rate reform for China's still-fragile banking system may not be able to cope with sudden liberalization.
Goldstein further added that to speed up currency reform in China, the US Treasury should not hesitate in branding China a currency manipulator. In other words, call a spade a spade so that the current game of gradual but barely noticeable appreciation ends. He too called for the IMF to take a more proactive role in deeming China's exchange rate policy inappropriate. To his thinking, if the US and the IMF both brand China a currency manipulator, international pressure would increase for China to revalue its currency at a faster pace since the arguments for gradual adjustment have yielded few results thus far.
Lastly,
John Makin of the American Enterprise Institute made the oft-repeated
pitch that it is in China's best interests to move on its exchange rate due to rising trade tensions, domestic inflation pressures, and rising asset market volatility. He exuded pessimism in believing that unless China changed its current course, "we may expect to see a crisis erupt sometime in the next twelve months comparable to the Asian currency crisis that erupted in 1997. In particular, caps on prices may result in goods shortages together with social disorder." He then noted "Long gas lines already exist in China and signs of social unrest are on the rise. If, alternatively, the Chinese simply permit inflation to rise rapidly, the result will again be more social instability."
Makin concluded by saying "Some yuan appreciation would help to signal a need for appreciation of most Asian currencies, including the Japanese yen...The Chinese and the leaders of other major nations of the world cannot continue, simultaneously, to complain about global imbalances while resisting exchange rate adjustments..."
Four testimonies, four viewpoints. The sensible-shoe me sides with
Prasad, while the action-hungry political science major in me sides with
Goldstein and his offensive-minded approach. Either way, expect more strong-armed tactics coming out of Congress in the near future. I just hope that America's elected officials take note of some of the more sensible things said by these economists.
The issue at hand is in regard to discrimination. The US claims that it prohibits interstate gaming to "protect public morals." Yet, it still allows the placement of interstate bets on horse racing through the 1978 Interstate Horseracing Act (IHA). Although the WTO allows countries to ban such forms of gambling, the problem is that the US discriminates by banning operators in Antigua while allowing horse racing bets to be placed across borders. The US passed the Unlawful Internet Gaming Enforcement Act (UIGEA) that prohibited credit transfers for cross-border betting in October of last year, but did nothing to clear up conflicts with the IHA. In fact, the WTO cited UIGEA as a source of further confusion. In the meantime, the online gaming industry, which has been hard-hit by legislative moves, is seeing this ruling as a potential respite. The US will have to allow offshore Internet gaming operators to ply their trade in America once more, or eliminate off-track betting on horses once and for all.
The issue at hand is in regard to discrimination. The US claims that it prohibits interstate gaming to "protect public morals." Yet, it still allows the placement of interstate bets on horse racing through the 1978 Interstate Horseracing Act (IHA). Although the WTO allows countries to ban such forms of gambling, the problem is that the US discriminates by banning operators in Antigua while allowing horse racing bets to be placed across borders. The US passed the Unlawful Internet Gaming Enforcement Act (UIGEA) that prohibited credit transfers for cross-border betting in October of last year, but did nothing to clear up conflicts with the IHA. In fact, the WTO cited UIGEA as a source of further confusion. In the meantime, the online gaming industry, which has been hard-hit by legislative moves, is seeing this ruling as a potential respite. The US will have to allow offshore Internet gaming operators to ply their trade in America once more, or eliminate off-track betting on horses once and for all.
