Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.
“We should take out the baseball bat on Paul Krugman — I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China.
“We’re lashing out at China rather than tending to our own business,” which is raising US savings, Roach said.
“I’m a little surprised at Steve for saying that,” said Krugman, the Princeton University professor and Nobel laureate in economics, in a telephone interview when asked to respond to Roach. “What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued.”
The debate between the two economists echoes verbal clashes between the nations, with Chinese leaders repeatedly saying that their yuan policy isn’t the cause of the US trade gap. American lawmakers have urged the Obama administration to step up pressure on China for keeping its exchange rate unchanged, a stance criticized as providing an unfair advantage.
Premier Wen Jiabao’s government has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade. It allowed the currency to appreciate 21 per cent in the three years before that.
The country has accumulated a record $2.4 trillion of reserves, and $889 billion of US government debt, partly a consequence of its exchange-rate policy.
Global economic growth would be about 1.5 percentage points higher if China stopped restraining the yuan and running trade surpluses, Krugman said at an Economic Policy Institute event in Washington March 12. He said the US may need to get more aggressive in its talks with China, perhaps by treating the exchange-rate as a countervailing duty or other export subsidy.
“I’m a little curious what Steve thinks would happen if the US increased savings” without a stronger yuan, Krugman said today. “Where would the demand” for goods and services come from, he asked. Boosting savings should be done “in the long run,” not now, he also said.
Krugman is “giving Washington very, very bad advice,” Roach said in a later interview when asked to respond to Krugman’s reaction to his remarks. “I totally reject his idea that savings is bad.”
The US trade deficit is due to a shortfall of savings, and any attempt to address the bilateral gap with China would just cause a shift to another country as Americans kept up their spending, according to Roach. He added that while Krugman and he have been in agreement for years, they are in total disagreement right now.
“What the world needs is a shift in the mix of saving,” Roach said in a further e-mail. While China has a “major surplus saving imbalance,” it’s “highly debatable” whether it’s because of the yuan stance. Efforts to boost Chinese consumer spending will be a more effective way to address the issue, he said.
Roach, 64, has since 2007 served as senior representative of New York-based Morgan Stanley to clients, governments, and regulators across Asia. He was previously the investment bank’s chief economist. Before joining Morgan Stanley in 1982, Roach worked at Morgan Guaranty Trust Company and on the research staff of the Federal Reserve Board in Washington. He has a PhD in economics from New York University.
Krugman, 57, has worked at New Jersey-based Princeton since 2000, previously serving at the Massachusetts Institute of Technology, the International Monetary Fund, and Yale University. He won the Nobel prize for economics in 2008 for his theories on world trade, and earned his doctorate in 1977 from MIT.
Premier Wen said on March 14 in Beijing that “I don’t think the renminbi is undervalued,” using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”
Goldman Sachs Group Inc. Chief Economist Jim O’Neill this week indicated he agreed with Wen’s assessment, saying the currency “actually isn’t particularly undervalued anymore.” He told reporters at London’s Foreign Press Association “it’s unfortunate that we have so much political angst around this. The key thing is that post-crisis, China is importing a lot.”
China’s trade surplus narrowed to a one-year low of $7.6 billion in February. The US trade deficit was $37.3 billion in January; it has shrunk from a record $67.8 billion in August 2006 as American consumers slowed spending amidst the recession. Net exports have contributed to gross domestic product the past two years.
Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina this week introduced legislation to make it easier for the US to declare currency misalignments and take corrective action. The Treasury Department is set to decide next month whether to label China as manipulating its currency.
“Isn’t it the height of hypocrisy an American can articulate a particular position in its currency but the Chinese are not allowed to do that,” Roach said today. “Especially since they as a developing economy with an embryonic financial system need a currency anchor probably a lot more than more ’sophisticated economies’ like the United States.”
The US envoy to China this week said that the “recent turbulence” between the world’s largest and third-biggest economies was part of “the natural cycle” and wouldn’t harm long-term ties.
“I am convinced that blue skies are already on the horizon,” Ambassador Jon Huntsman said yesterday in a speech at Tsinghua University in Beijing.
