Guido Mantega, the Brazilian finance minister, is warning of new currency wars. Robert Zoellick, World Bank president, is arguing for a new gold standard. US policymakers suggested numerical balance of payments targets. Their Japanese counterparts are busy intervening to prevent further Japanese yen appreciation. The casual observer can be forgiven for believing currency imbalances are at the centre of the international financial crisis and their correction the salvation of the world economy. This would be an error.
The recurrent and now de rigueur shouting matches between US and Chinese policymakers on the pace of revaluation of the Chinese renminbi are in our opinion more political than anything else. The Chinese trade and current account surpluses are the mirror image of their saving/investment imbalance. The Chinese gross domestic saving rate exceeds 50 per cent of gross domestic product, very high in an absolute historical context. Any attempt to address global trade imbalances, let alone US popular discontent with the issue, must start there. The Chinese save a lot for a host of structural reasons that most economists, US and European policymakers included, clearly understand, in spite of exhortations to the contrary. The idea that major causes of high savings in China, from mass urban migration and a lack of any meaningful social security net to a 50-year-old one child policy, can be meaningfully addressed merely through a large nominal exchange rate revaluation is laughable. And if it were, in fact, possible to do this through adjustment of a relative price, the revaluation necessary would surely be on the order of magnitude of 40-60 per cent, a size even the most optimistic foreign observers cannot possibly expect the Chinese to deliver.
US policymakers understand this. In exchange for the goods and services they sell into the US, the Chinese receive US dollars, which they accumulate through intervention and dutifully invest in US Treasuries (no matter what degree of reserve diversification they claim). When they have tried to buy real assets, such as energy and resource assets in the US, they have been prevented from doing so by Congress on national security grounds. The US understands that it is paying China in the form of a currency it can inflate away or devalue. Finally, without Chinese purchases of US Treasury bills (on the back of its FX intervention), the US would not be able to run budget deficits of 10 per cent of GDP, a fiscal position that underlies its massive current account deficit.