Constructive criticism

The argument between the US and China over currency and economic policy is an old one, but the tone and the volume of the griping varies. However, just hours before US President Barack Obama touched down in Shanghai on Sunday, China’s chief banking regulator Liu Minkang was loosing a salvo at the US Federal Reserve Board. The Fed’s policies of keeping interest rates low for an indefinite period of time are fueling speculation and increasing downward pressure on the value of the dollar, damaging the recovery of developing economies, including China, he said. He was supported, to a certain extent, by a panel of IMF economists, who announced last Wednesday that the current crisis is caused by the dollar’s position as an international reserve currency (although in the same report the IMF also called for China to be more "responsible" about its massive surplus).

While this is fairly standard pre-meeting bluster, Liu may well be right. But the question is, should the US pay any more attention to this particular bluster and let China dictate the meeting agenda? After all, China hasn’t expressed much concern about what its currency and economic policies are doing to the US economy. To what extent the renminbi would naturally appreciate against the dollar if allowed to do so is a matter of debate – as is how much benefit this would actually provide US manufacturers – but regardless, it is an irritant to those who believe Chinese policy is entirely selfish. And whatever genuine domestic consumption that has been created by the stimulus package, Chinese demand is not creating much in the way of jobs in the US; the US firms best positioned to benefit from growth are hiring in China, not the US.

Still, the US should care what China says about its economic management, for two reasons. First, the US needs Chinese cooperation on international security, specifically with North Korea and Iran. Indeed, Beijing went to far as to suggest a statement from Obama about Tibet would encourage China to bring more pressure to bear on North Korea. Second, by buying so many US Treasuries, China is effectively letting the US capture the productivity of millions of Chinese workers to bail out its economy, and if the dollar devalues without producing an economic recovery in the US, this productivity is wasted. Certainly if the US policy mixture was producing anything like the results the Chinese package has produced, China would have little time to complain because everyone on both sides of the Pacific would be distracted by all the money pouring in. But too many economists have pointed out that the US package is relatively small compared to the scope of the problem, that it has failed to encourage lending and investment, and that many of its provisions are economically pointless make-work programs and pork for pet projects. Granted, the Chinese package has its own issues, namely that much of it is also fueling speculation, and seems to be exacerbating earlier structural problems – such as its over-dependence on low-end export manufacturing – that forced China to buy so many US dollar reserves in the first place. Fundamentally, however, Beijing’s package appears to have succeeded in the crucial test of restoring confidence in its economy.

China knows well that in the long run, the success of its economic policy depends on the success of US economic policy. So the US might consider the Chinese recommendations helpful, even if somewhat hypocritical. At the same time, if all this bluster is intended to prevent the US from bringing its own valid concerns to the table, or to humiliate Obama, who is coming to Asia from a position of weakness, bearing little in terms of free-trade deals or other policy gifts, the constructiveness of the criticism will be lost, to both parties’ detriment.