Forex rates no magic cure for imbalances: China central bank
BEIJING: Policy makers need to tackle global economic imbalances, but it is an illusion to think they can be ironed out solely by exchange rate changes, a senior Chinese central banker said on Saturday.
Yi Gang, an assistant governor at the People’s Bank of China, said the imbalances could be sustained for a period if Asian countries use their surplus savings to plug the US current account deficit. But they could not be sustained forever.
“Global imbalances require fundamental adjustments. The impact of exchange rates in bringing about such adjustments is very limited. We cannot pin our hopes solely on exchange rate changes,” Yi told a forum at Peking University.
He said a stronger yuan might stimulate imports but would not have much of an impact on China’s high savings rate one of the fundamental sources of the imbalance in the country’s economy.
Similarly, he said it was an “Arabian Nights” fantasy to imagine that tinkering with the yuan could lead to a shift in the US savings rate another root cause of global imbalances.
Yi said action was warranted now, but he added “this policy adjustment will be a gradual process, and I believe the possibility of a hard landing for the global economy is low.”
Finance ministers from the Group of Eight leading nations will have the opportunity to discuss the prospects of correcting the imbalances at a meeting in Moscow on Saturday.
The United States says part of the solution lies in a faster rise in the yuan to help bring down China’s trade surplus, which more than tripled last year to $102 billion by Beijing’s calculations.
Washington, which collates the data differently, put the US deficit with China last year at $201.6 billion, or almost 28 percent of its total trade deficit of $725.8 billion, a record.
But Yi said China’s surplus with the United States had to be seen in the context of its big deficit with the rest of Asia, because China imported components and raw materials that it then processed for export to the United States and Europe. The surplus, in other words, was a result of globalisation.
Still, Yi said China would adjust its monetary and macroeconomic policies in order to boost consumption and reduce its balance-of-payments surplus. To that end, the central bank had some room for manoeuvre because interest rate differentials and the prospect of further rises in US rates were reducing hot money inflows into China something that had made it harder to set monetary policy.
One-year dollar interest rates are already more than 3 percentage points higher than yuan rates, so it was not profitable for speculators to borrow dollars and buy yuan unless they thought the Chinese currency would appreciate by that much in the coming year, Yi said. reuters
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