Thursday, April 22, 2010

Ah, soft power: a chorus of nations urges yuan appreciation

On several occasions I have flagged wise voices urging the U.S. to seek allies (Aryind Subramanian) and work through multilateral channels (Jeffrey Garten)  in its effort to convince China to let its currency appreciate. Recently, Larry Summers was singing from the same page:
...we think that countries with large surpluses need to be focused on shifting the pattern of demand towards reliance on domestic demand.

And clearly, exchange rates, which are the relative price of domestic and foreign goods, are one crucial aspect of that, and so I think that’s going to have to be an active area for international consideration going forward because I think all countries have a stake in more balanced growth, and I think where there are large reliance on external growth, that does raise questions about the sustainability of the expansion.

And so in our dialogue with China through the strategic economic dialogue, in our participation in the IMF with its enhanced mechanisms for global surveillance, as we move towards the G20 meetings in Canada and Korea this year, I think these are going to be very important issues (my emphasis).
Not to jump at shadows, but it looks like more pieces on Obama's international chess board may be moving into position on this front.  From today's FT:
China is facing growing pressure from developing countries to begin appreciating its currency, providing unexpected allies for the US in the diplomatic tussle over Beijing's exchange rate policy.

Speaking ahead of a meeting of finance ministers and central bank heads from the Group of 20 countries which starts today in Washington, Indian and -Brazilian central bank presidents have made the most forceful statements yet by their countries about the case for a stronger renminbi. [snip]
Duvvuri Subbarao, governor of the Reserve Bank of India said that an undervalued renminbi was creating problems for countries, including his own.

"If China revalues the yuan, it will have a positive impact on our external sector," Mr Subbarao said. "If some countries manage their exchange rate and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively."

Lee Hsien Loong, prime minister of Singapore, added his voice to the debate last week, saying it was "in China's own interests" with the financial crisis over to have a more flexible exchange rate.
 Brazil, India, Singapore -- that's some nice diversification.   Cf. Subramanian on Feb. 3:
But progress also requires that the silent victims speak up. Emerging market and developing countries must do a “Google” on China.... By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status. Only a wider coalition, comprising all countries affected by China’s undervalued exchange rate, stands any chance of impressing upon China the consequences of its policy and reminding it of its international responsibilities as a large, systemically important trader.
 And here is Garten's prescription:

The best existing example is the World Trade Organisation, where China is obliged to play by the rules that a number of leading countries have subscribed to, and which has an orderly process of adjudication. While it still has leadership clout, the centrepiece of US efforts ought to be marshalling multilateral support for other such arrangements. It should press for a new, strengthened global monetary system based on multiple currencies, with enforceable rules for currency management to which both it and China would subscribe. Washington should redouble efforts to work with a number of countries on an enforceable climate change treaty. It should garner other nations’ support for global arrangements regarding the operation of the internet
This half-a-BRIC chorus is an early step on a very long road. There's reason to expect much tension and confrontation (nonviolent, I trust) with China in months and year ahead.  But these green shoots  -- some movement by China toward coalition vis-a-vis Iran, some movement by major developing (and developed) economies vis-a-vis China -- should be recognized as early if fragile fruit of Obama's soft touch and persistence.

See also: FT triptych: a "multilateral web" for China

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