Economy

Stiglitz says yuan appreciation a threat to Chinese jobs

(Xinhua)
Updated: 2010-10-16 11:32

NEW YORK - Any further appreciation of the Chinese currency yuan would make the position of China's manufacturers even more precarious, a leading US economist Joseph Stiglitz said Friday.

At Columbia University, Stiglitz, a winner of the Nobel Prize for economics in 2001, told media that China had also allowed wages to rise, which was already making Chinese goods less competitive. Further appreciation of the yuan would harm China's manufacturers more.

His remarks follow frequent calls in recent months by the United States that China should urgently appreciate the value of the yuan. It claims China pegs the yuan to the US dollar at an artificially low rate. The weaker yuan makes it cheaper for the United States to import Chinese goods, and relatively more expensive to export its own goods, it says.

The consumption of Chinese goods by American and European consumers has fuelled growth in China's manufacturing sector, and created hundreds of thousands of jobs. However, the slowing demand for Chinese exports in the West, caused by the latter's stagnating economies, has hurt Chinese manufacturers.

"There are a lot of Chinese factories on the verge of lack of profitability," Stiglitz said, "If the exchange rate goes up, and they cannot charge the same price, many of them will go bankrupt, many workers will lose their jobs, and that will lead to problems in China. And Chinese leadership obviously cannot countenance high unemployment."

In July 2005, China took measures to revalue the yuan and adopted fresh modest measures months ago to further revalue it. The currency has strengthened by 22 percent against the US dollar since July 2005.

Yet, in September, the US Congress passed legislation that could punish countries whose currencies are perceived to be fundamentally undervalued. The legislation, which could label China as a currency manipulator, is awaiting approval by US President Barack Obama.

Stiglitz doesn't think that merely increasing consumption in China, that is, getting it to import more goods, as some economists suggest, will help the world economy much.

"Asia, India, China, are too small to rescue Europe and America," he said, "Consumption in India and China together are just 12 percent of global consumption. Even if they grow faster, it is not enough."

A former chief economist for the World Bank, Stiglitz has long advocated that governments spend in time of an economic crisis to keep their economies at close to full employment.

Moreover, Stiglitz said "the US saves too little," highlighting the crux of the current US troubles.

"We have to borrow from abroad and that causes our trade deficit. Changing the exchange rate will not change that savings rate a great deal."

Indeed, borrowing from China has long funded US consumption.

According to the US Treasury, China held $46.7 billion of its treasury bills as of July 2010, making it the largest holder of the bills.

Related readings:  Exports encounter major hurdles  China trying to avoid currency war  Fast yuan revaluation no panacea - top banker  Fast-rising yuan a 'risk to global economy'

In spite of $700 billion of public money used by the US government to bail out its banks and create jobs in the aftermath of the 2008-2009 financial crisis, the United States is still struggling to grow.

Writing in The New York Times on Oct 10, distinguished liberal economist Paul Krugman suggested the idea that a stimulus took place in the United States "is a myth. There never was a big expansion of government spending."

He said: "That has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need."

Now, in an attempt to stimulate demand, the US Treasury is buying back treasury bills before they have matured. This process, known as quantitative easing, has the effect of releasing dollars into the economy, thereby reducing the value of the dollars in circulation.

This comes on top of already low interest rates (between 0.2 percent and 0.25 percent according to latest US Federal Reserve data), which have been put in place to help businesses start borrowing to beat the recession.

The appreciation of other currencies will mean the US dollar depreciates in turn, and helps boost US exports, while reducing the incentive to invest in America. Stiglitz said: "We are in a form of beggar-thy-neighbor policy of competitive devaluation."

He said US and Chinese investment of savings in internal development programs such as health, education, climate change mitigation strategies, green energy technology and transport infrastructure would improve living standards, boost economic development and reduce reliance on export-led growth.