Is the Chinese currency, the renminbi, dangerously undervalued and a threat to the global economy? Over thirty important experts offer their views.

• Position: A Symposium Of Views

Background:

Chinese companies themselves--with their virtually zero marginal labor cost work force--lack global reach. But are foreign companies now investing heavily in China as a manufacturing base setting the stage for ever-increasing global deflationary pressures? Areas such as the Pearl River delta are now attracting $1 billion per month in foreign investment. In theory, such a shock to the system should produce offsetting adjustments from the global central banking community. But have the central bankers responded adequately? How, if at all, should the G7 policy community address the Chinese currency issue? To what extent do escalating foreign investments in China set the stage eventually for a potential destabilizing of the entire world trading system? Or are all of these concerns essentially unwarranted?

Yes, and the nightmare is coming.

BARTON M. BIGGS Managing Director and Chief Global Strategist, Morgan Stanley There is no doubt that the huge, mindless inflow of investment money into China is increasing global deflationary pressure on manufactured goods. This is causing dislocations in manufacturing industries and job markets not only in G7 countries but in developing economies as well. The consumers of the world are the beneficiaries through lower prices, but profits and jobs are being lost both in the West and the other developing economies. It is also questionable that the Western-owned manufacturing facilities in China have been or will be able to repatriate their profits. Plants in China may just be a great sinkhole for the West.

Furthermore, if geopolitical events and fear of terrorism cause the United States to close its borders and retreat to Fortress America, China with its massive exports will be the biggest loser from the inevitable contraction of world trade.

I am no international economist. Common sense suggests pressure should be put on China to allow its currency to find its own level which certainly would be higher against the dollar. As for the massive investment boom (or should I say "bubble") in China, a bust is bound to come. A country that does not have a free markets capital allocation mechanism is uniquely unqualified to mitigate the excesses of an investment boom. After all, if the West with its sophisticated public markets and information dissemination systems was totally incapable of coping with the technology bubble, what hope is there for China? The greater the bubble, the bigger the bust. In China's case, the resulting unemployment of perhaps even several hundred million young men and women could destabilize the world.

Of course the hope is that there is a central bank chairman hidden away in some musty office in Beijing who has the stature and knowledge of Greenspan and the guts that Greenspan lacked. I don't see that there is much the G7 central bankers can do. Economists have created the legend that China is the new engine of world growth. I fear it is a myth about to become a nightmare.

Yes, for both domestic and international reasons.

3. FRED BERGSTEN Director, Institute for International Economics, and former Assistant Secretary of the Treasury for International Affairs China should float the renminbi, and permit it to appreciate in the currency markets, for both internal and international reasons.

Domestically, China is wasting large amounts of resources by piling up excessive and low-yielding foreign exchange reserves. Its desire to continue insulating itself from Asian-type financial crises after it relaxes its exchange controls is understandable but its current hoard of more than $250 billion, second in the world only to Japan, is far beyond any conceivable need. Much of those reserves are placed in U.S. Treasury liquid assets, yielding less than 2 percent, while investments in China's booming economy typically yield at least five to ten times as much. A country that is still as poor as China (per capita income of about $1,000) can ill afford to use such an important share of its savings so unproductively.

Internationally, China is now the world's third or fourth largest economy and must increasingly think of itself as a key participant in the global adjustment process. Given both its low per capita income and its very large influx of foreign direct investment, it clearly should be running a sizeable current account deficit (compared with its present modest surplus). This swing would contribute importantly to the needed reduction in the U.S. current account deficit, and would require that the renminbi appreciate against the dollar along with the currencies of America's other major trading partners (notably Canada, Europe, Japan, Korea and Mexico). (The fact that those other currencies would also be rising against the dollar means that the appreciation of the renminbi in trade-weighted terms, which is what counts for its overall competitive position, would be much less than its rise against the dollar and would probably be rather modest.)

China's de facto dollar peg (and Hong Kong's explicit dollar peg) now produce perverse results in terms of the international adjustment process. When the dollar declines, as it has over the past year by a trade-weighted average of about 10 percent but by much more against the euro and yen, the renminbi falls along with it. China's international competitive position thus strengthens and its current account surplus rises further, placing additional pressure on America's other trading partners to accommodate the needed reduction in the U.S. deficit.

China's legitimate desire for a stable exchange rate would be enhanced by a managed float of the renminbi. The rate is now kept virtually constant against the dollar but, in light of the dollar's sharp rise against virtually every other currency from 1995 until a year ago and its substantial fall since, the "real effective" (inflation-adjusted, trade-weighted) exchange rate of the renminbi has been quite unstable. China would promote many of its own purposes, as well as international prosperity, by floating the renminbi.

No, China's role is a blessing to the world economy.

GENE H. CHANG Director, Institute for Asian Studies, University of Toledo, Ohio, and co-editor of China Economic Review Is the RMB undervalued? The purchasing power of the RMB is higher than its official exchange rate, a 4.75:1 ratio, but this is common for all developing countries. The same ratios for India and Russia are 5.33 and 4.18 respectively, and average ratios for low-income and lower-middle-income countries are 4.85 and 4.05 respectively. The RMB is not abnormal. The official exchange rate of the RMB has experienced a de facto devaluation of about 5 percent since 1999, due to domestic deflation and a rise in productivity. Yet this did not make the RMB substantially undervalued, as the black market exchange rate for the RMB in 2002 was the same of the official rate.

The U.S. and Japanese concerns about an undervalued RMB come from the flood of cheap products from China. The Chinese labor cost is low, as is its productivity. The low Chinese labor cost was due to an unlimited supply (120 million-plus) of rural surplus labor, who are willing to work at the subsistence level. It is a market outcome and little can be done to alter it at this stage.

Although China has substantial trade surpluses with the United States, it runs huge trade deficits with its other Asian neighbors. China's overall current account surplus is $30 billion, which is only one quarter of Japan's. Foreign capital flooded to China in recent years because of the recessions in the United States and Japan and unstable situations in Indonesia, Philippines, and other countries, not because of an undervalued RMB.

Revaluation of the RMB is not a solution for the domestic economic problems of the United States and Japan. First, the trade deficits with China account for less than 1 percent of U.S. GDP; thus the effect is very limited. Second, a revaluation of the RMB may cause the trade deficits to widen rather than shrink, because China's products are often necessities with inelastic demands. In this case, a J-curve could prevail. Finally, revaluation of the RMB must result in a loss in consumer's surplus in importing countries.

Rapid growth of the Chinese economy, rather than a revaluation of RMB, is the most effective solution for the concerned problems. As its economy grows, China will increase imports from the United States, Japan, and the rest of world. China (including Hong Kong) already imports more from the rest of Asia than Japan. China's demand turned the otherwise-soft world steel market to buoyant in 2002. This momentum continues as U.S. and Japanese auto parts and assembled autos flood into China this year. In fact, China's overall trade balance already turned to a deficit in January, 2003. It is therefore evident that the concern about the undervalued RMB is unwarranted, and that the growth of China's economy is a blessing rather than a threat of the world trading system.

China's effect on the world is fundamentally healthy.

RICHARD N. COOPER Maurits C. Boas Professor of International Economics, Harvard University It is true that China runs a current account surplus ($17 billion in 2001, smaller however than the surpluses of Taiwan, Belgium, Switzerland, and several larger countries), and has built up its foreign exchange reserves to $270 billion, an increase of $58 billion over the past year. These are signs, in a poor country, that the currency is undervalued. The yuan (rmb) has been fixed to the U.S. dollar at 8.28 since 1994; the extensive buildup of China's reserves suggests the currency would have appreciated in an unconstrained market.

However, China has not sterilized its buildup of reserves; money supply has increased rapidly, and has been accompanied since 1998 by a stimulative budget, both associated with annual growth in excess of 7 percent on official figures. Moreover, China's accession to the World Trade...