Mon, Jan 17, 2011 - Page 8 News List

Urgent need for US-China dialogue

By George Soros

Chinese President Hu Jintao’s (胡錦濤) visit to Washington is coming at a time when economic conflict between the US and China has become one of the most worrying global developments. Throughout last year, the US pressed Beijing to revalue the yuan, while China blamed the US Federal Reserve policy of quantitative easing for currency-market turmoil. The two sides are talking past each other, though both are making valid points.

The global imbalances that were at the root at the 2008 financial crisis have not been corrected — indeed, some have grown larger. The US still consumes more than it produces, running a chronic trade deficit. US consumption remains too high, at nearly 70 percent of GDP, compared with an unsustainably low 35.6 percent of GDP in China. US Households are over-indebted and must save more.

The US economy needs higher productivity, but US corporations, which are operating very profitably, are accumulating cash instead of investing it — with quantitative easing aimed at heading off deflation. In China, by contrast, bank lending needs to be reigned in, but regulatory efforts have been hindered by off-balance-sheet financing and the development of an informal quasi-banking sector. The Chinese economy is showing signs of overheating.

These imbalances could be reduced by the US using fiscal rather than monetary stimulus, and China allowing the yuan to appreciate in an orderly manner. However, domestic politics in both countries stand in the way.

In the US, the Republicans, who won the midterm elections, were determined to extend former US president George W. Bush’s tax cuts in their entirety. This leaves little room for fiscal stimulus, while the tax cut is more likely to be saved than invested. That is why the Fed had to resort to quantitative easing, even though it tends to stimulate asset bubbles rather than productive investments.

China interprets quantitative easing as a plot to devalue the US dollar and force a revaluation of the yuan. The US, in turn, cannot understand why China should be so reluctant to allow the yuan to appreciate, as doing so would help to dampen inflationary pressures.

Maintaining a two-tier currency system and an undervalued currency has been the key to China’s success. It is much more efficient than taxation as a means of skimming a significant share of payments for Chinese exports, which accrue as currency reserves and can be used at Beijing’s discretion. This has made the Chinese central government very powerful, attracting the best brains into its service. China would prefer to improve the trade balance by removing trade barriers rather than exchange-rate adjustment, because it is reluctant to put additional strain on its export industries and eager to gain access to US technology.

The US maintains restrictions on high-tech exports to China because of the latter’s lack of respect for intellectual property rights. The US prefers higher Chinese import prices to help relieve deflationary pressures — which would also eliminate the need for quantitative easing, removing a source of Chinese complaints.

As things stand now, each country is pursuing policies that do not help the other and are suboptimal for their own economies. The entire global economy would benefit if both sides listened to each other and coordinated their economic policies.

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