RMB no scapegoat for US woes
By Tao Zhipeng and Xu Ruiheng (China Daily)
Updated: 2005-02-05 09:05

Some US financial heavyweights, including Fed Chairman Allen Greenspan, have been raising their voices in recent years over the "appreciation of renminbi," while dodging the issue of the plummeting US dollar's exchange rate. They claim that renminbi must be revalued if the Chinese economy is to avoid overheating.

It is still fresh in people's memory that China, in the face of great risks and pressure, made painstaking efforts to maintain stability of the renminbi exchange rate during the 1997 Asian financial crisis. In this way, China contributed greatly to defusing the crisis and reversing the declining trend of Asian and global financial sectors. It should not be forgotten that all this was done at the expense of China's own interests.

Recently, a number of banking, research and media institutions, including the Hong Kong & Shanghai Banking Corp, Morgan Stanley, Business Week and the Washington-based Cato Institute issued their research reports, criticizing the unjustified insistence that "renminbi should appreciate." They suggested the strategy of "maintaining a weak dollar" adopted by the US Government is directly targeted at Asian currencies, China's renminbi in particular.

This kind of monetary policy of shifting crises to others has been questioned by some US economists as well as by some media. The US-based Business Week says in an article that the way out for the United States' budgetary and trade deficits lies in relying on domestic efforts instead of targeting others.

As early as four or five years ago, a school of US economists trumpeted hard for the dollar to be devalued by large margins against other major currencies. They argued that in view of the mounting US trade deficits stemming from the overvalued US dollar, it was necessary to devalue, a move which, in turn, would sharpen the competitive edge of US commodities on the world market. Otherwise, the US dollar was bound to make a forced and hard landing.

Against this backdrop, plus some unpredictable factors in the world economy, the dollar's exchange rate against the euro has continued to drop in recent years, once hitting a low of one US dollar for 0.76 euro. The falling margin reached 50 per cent.

The devaluation, however, has not redressed the United States' huge trade deficits as expected. So people cast doubt on the "dollar-devaluation" theory. They found that the root cause behind the sharp rise of US trade deficits was not the greenback's high exchange rate, but the extremely low bank savings rate of Americans who excessively spend future money on current consumption. The comparatively weak demand for US goods in some sectors of the world market is also to blame.

Jeffrey E. Garten, provost of the School of Management of Yale University, criticized dollar-devaluation policy, arguing it was wrong because the US Government was failing to resolve the fundamental problems which caused the trade imbalances. The United States borrowed heavily from overseas because Americans consumed a lot but saved very little. The average American today, for example, put only 0.2 per cent of his or her disposable income into the bank, the lowest savings rate in the past 45 years. A low bank savings rate meant there was not enough money to finance investment. Hence the United States borrowed considerably from overseas lenders. At the same time, the US Government needs foreigners to buy its treasury bonds to make up for increasing budgetary deficits. Unfortunately, the "dollar-devaluation" theory had the ear of Greenspan and US Treasury Secretary John Snow.

Garten also refuted the theory that devaluation could help lower the price of US goods and boost US exports. Garten believed devaluation was not likely to help reduce imports by large margins because one-fourth of US expenditure on those was used to buy oil and oil prices are calculated in US dollars. So in this scenario, dollar devaluation would result in declining incomes for the oil producers of Organization of Petroleum Exporting Countries (OPEC), which in turn, would force OPEC to raise prices. In view of all this, dollar devaluation does not work in the way its advocates anticipate.

Given this reality, the United States should not let the dollar value go down again and again. Instead, US policymakers need to cut financial deficits sharply and increase tax revenues in order to reduce trade deficits. This kind of monetary policy, however, is obviously not to the liking of the Bush administration, which pursues a conservative ideology. As a result, the policy has been formulated to make the international community share the economic baggage exclusively the making of the United States.

US-based Newsweek magazine came up with a vivid metaphor recently: The United States, faced with its own economic problems, is trying to forge a "dollar-devaluation alliance" as it did an "anti-terror alliance" when confronted with the issue of terrorism. In doing so, it hopes its own problems can be resolved at the expense of Europe, Japan and the whole of East Asia.

Western analysts widely believed China seemed not opposed to Washington's insistence that the renminbi should revalue, but that it hoped to act at its own pace, rather than yielding to pressure from outside. They also believed changes in the exchange rate of the renminbi could only be decided by China's own economic and political interests.

Western analysts also note that Chinese leaders are very much concerned with the trajectory of the dollar.

During a meeting with US President George W. Bush at the APEC summit, President Hu Jintao made it clear that China is greatly concerned about the downward trend of the US dollar. Premier Wen Jiabao, while attending the ASEAN 10+1 summit, also remarked that China is maintaining a close watch on the weakening dollar. He said China is a responsible country, as demonstrated by its maintained stability of the renminbi during the Asian financial crises in the face of overwhelming pressure.

Clearly, the Chinese leaders are telling the world that China will never succumb to pressure from outside and will act on the principle that any action it takes will be one that benefits the Chinese economy, while holding itself responsible to the international community.