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[Music]
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China and Western countries been
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squabbling over exchange rates for years
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the United States and many other
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countries accused China buying dollars
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to keep China's currency weaker than it
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would be otherwise that makes Chinese
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Goods cheaper in other countries and it
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makes it more expensive for the Chinese
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to buy from foreigners in the United
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States politicians and Regulators say
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China's policy undermine exports costing
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American jobs knowledge at Wharton has
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invited Professor Franklin Allen
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professor of Finance to explain what's
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at stake and why this conflict is so
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hard to
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resolve the first thing I that I've
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noticed in this is that uh the China
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currency issue is one of the few things
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that Democrats and Republicans seem to
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agree on and I'm curious whether you
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believe that China's manipulating its
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currency so I think manipulation is an
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emotive word they're doing what many
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countries have done through much of
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History which is to fix their exchange
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rate relative to another currency and
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through much of the Breton Woods period
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of course this is what pretty much every
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country did it's what the Europeans are
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doing to an extreme degree in the Euro
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but it's not too much different than
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what they did in the exchange rate
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mechanism before the euro was introduced
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and it's not too much different from
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what the entrance into the Euro have to
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do before they actually enter properly
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and fix um the exchange rate so I I
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think manipulation is the wrong word
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they're fixing their exchange rate for
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sure and uh I gather that the the the
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intent is to keep the Chinese currency
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weaker uh in in in relation to the
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dollar or is that is that right and and
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what's the what's the reason for doing
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that how do they
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benefit so this is a complicated
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question originally I think it's for the
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same reason that European countries
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wanted the Euro if if you want to export
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it's good to have a fixed exchange rate
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and China thought that this was
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something that was beneficial for them
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some time ago over time we've evolved
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and I think we're now in in a rather
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different position so originally they
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didn't run big surpluses they didn't
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have big reserves but then what's
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happened over time is that particular
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after the Asian crisis many countries
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have built up big reserves so the
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Chinese are by no means the only ones if
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you look at the smaller countries like
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South Korea and countries like that
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they've also built up reserves I think
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there are many reasons for that part of
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it was that the way that the IMF treated
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Asian countries in the 1997 Asian crisis
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LED them to believe that because the
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governance structure is dominated by the
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Europeans and the Americans the Asians
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don't get a fair look in I think their
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response to that has been we need to
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have reserves instead and this is one
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big reason for the reserves I think for
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the Chinese in addition they've realized
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over time that reserves give them a
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very great deal of political power with
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respect to the US so when President
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Obama goes to visit he's very polite he
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doesn't mention too many things about
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human rights and so forth because we owe
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them two and a half trillion the other
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reason which is the one that's given a
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lot of play in The Press is
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that by doing this by keeping the
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exchange rate low they're making it
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easier for their exporters and I think
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there's some truth to that but I think
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that it's much more complicated than is
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usually presented and and just give us a
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couple examples of what are the
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complicating factors that we don't
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usually consider well I think when the
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us or the Europeans say what you need to
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do is to let it
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move it's not clear what the the the
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short-term rate would be or the
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medium-term rate or the long-term rate
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if they simply allowed it to float it's
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true that there's a deficit on the
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current account at the moment that's
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been there for a few years now but
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there's also the capital account and
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whereas I'm sure there's lots of money
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wanting to get into China because they
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perceive the R&B to be a strong currency
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I think that the reverse is also true
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there's a lot of money that wants to get
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out of China first of all Chinese people
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don't have many instruments to invest in
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and that would give them so many more if
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they could take their money out and also
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of course there's the political reason
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that if you want to hedge the risk if
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you think that we may have problems in
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China going forward then also they may
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want to take money out in the short run
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it's not clear which of those balances
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would Dominate and in the medium term
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the long run it's not so clear either
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given differences in inflation rates and
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so on so it's more complex than
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portrayed my own view is that probably
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in the long run the R&B will strengthen
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and it probably is a good long-term
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invest
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investment so I
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think the there would be differences
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from now if the Western View is is often
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overly simplified I'm just curious
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whether it's possible the Chinese view
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is overly simplified as well well the
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problem is now I think you know if you
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take the long run view
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it's ironically both countries are on
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the wrong side because what the Chinese
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essentially are doing is giving us Goods
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real things for pieces of paper in other
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words dollars we're getting to consume
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it they're getting pieces of paper whose
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value is very uncertain in the long run
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even if you think that there will be a
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revaluation of 20% given their reserves
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are now
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about 50% or more of GDP if it we had a
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20% appreciation in the R&B they're
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going to lose about 10% of GMP
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this is an enormous loss for them it's
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about the same as trade for a year their
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net contribution of trade is about 10%
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of GDP so this is a sense in which
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they're running a big risk but it's also
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the sense in which when we say okay you
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need to let it float what we're doing is
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essentially going against our consumer
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interests people always talk about jobs
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and the necessity of saving jobs but
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these are relatively shortterm interest
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at least in normal times compared to
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these long run interests of them giving
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us Goods below price and us giving them
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dollars in in
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exchange now uh the the mechanics of
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influencing exchange rates is more
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complex than just saying this is what we
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want it to be uh can you just briefly
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give us a glimpse into how it's done
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it's purchasing us treasuries or
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whatever it is this process so
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essentially they go out and they put
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purchase us treasuries oh so what
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happens is there's either current
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account Surplus or some inflow of
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dollars into the into China so the
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Central Bank gets dollars and they give
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people who have exported say R&B in
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exchange they then go out and sterilize
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those which means they increase Bank
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Reserves or they sell government bonds
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so they don't have inflation in China
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and what the net result of all this is
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is that they end up with a lot of
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foreign reserves and they have
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offsetting debt now in the long run as I
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say this is not good for them it's very
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risky and what they need to do is to
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change it to get rid of this process and
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move towards having the R&B as a reserve
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currency we need the R&B to be like the
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Euro and the dollar and for them to be
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able to behave in the same way that the
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US and the EUR Europeans do they don't
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need reserves if they have a reserve
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currency and that will make everything
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much easier and avoid all these problems
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that we've been talking about and this
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process that you've described the the
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the result in the end is that it it
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affects the balance of supply and demand
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of dollars uh and and that that affects
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the exchange rate it does exactly this
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issue is is one of those things that
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that sort of comes up you hear about
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about it it's a big thing in the news
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there may be some meeting or some uh Us
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official will give a speech and there's
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a we're all in a tizzy for a while and
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then it kind of dies down and then it
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comes back again how important is it
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really so I think the exchange rate
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issue in itself is not that
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important in the medium term I think in
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the long run it's very important they
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move to being a reserve currency but the
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problem is we've now got politics
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involved and the Americans and the
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Europeans demanding that the Chinese
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change their policies is not a good way
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to go because the Chinese won't do it
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simply for the reason that we're asking
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them to do it I think they realize that
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in the long run they need to move
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towards having the R&B as a reserve
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currency they're doing many things in
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that direction for example they're
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beginning to clear trade in R&B they're
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allow owing R&B issues in Hong Kong by
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Foreign corporations like McDonald's
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these are all moves towards having the
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R&B as an international currency the one
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thing that remains is to have an open
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Capital account and a completely
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flexible exchange rate they know that
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they should do that but the more we tell
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them to do it the less likely they're
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going to do it a good example of
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how much they dislike being being told
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what to do was provided by the border
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dispute that they're having in the East
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China Sea in particular with Japan and
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the fact that they were so strident in
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cancelling the visit by the Thousand
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youths to shangai for the Expo by the
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Prime Minister making speeches after a
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very short time shows how willing they
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are to be aggressive in these kinds of
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issues and I think if we try and push
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them we won't be able to and our
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position is basically the weaker one
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because we're the ones that owe them the
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two and a half trillion if they start
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selling and moving money into Euros or
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into any of these other currencies we're
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quite vulnerable I think no nobody likes
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to be
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bullied right and the Chinese have 150
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years of being bullied by the west and
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this is something that they feel very
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strongly about in the west I I sometimes
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wonder whether uh uh blaming China for
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for problems is just a convenient way of
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not admitting that you're causing your
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own problems is is that part of what's
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going on here I think that is part of
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what's going on here I think we don't
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save enough we rely too much on being
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able to issue issue dollars and borrow
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and this is a longrun problem we need to
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start being more like the Germans and
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being more fiscally responsible and
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hopefully these problems will then go
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away I I don't think we're doing our
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part we're trying to insist that the
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Chinese do there but I I think we've got
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into this very bad position now and what
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do you think are the prospects that this
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could escalate into a trade war and a
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protectionist era that that would be
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damaging to
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everybody I think it's quite likely that
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we will get into a
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situation not of trade Wars I think that
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the the the WTO is sufficiently strong
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that whereas we won't make much progress
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I don't think we'll go backwards but I
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do think it's quite likely that
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governments will start intervening as
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they already have done in Japan and many
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other Asian countries and that this is
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not a good thing we're already printing
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too much money with quantitative easing
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the last thing we need is for these
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Asian countries to also be printing
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money to keep currencies down down and
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if you were to look around the world and
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say this is the organization or the
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country or the head of state or whatever
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that is in a position to do something to
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break this Log Jam uh who would that
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be I
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think the Americans and Europeans need
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to back off on this issue I think the
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people who can solve it in the long term
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is the next generation of Chinese
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leaders so when the new president and
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the new prime minister come in I think
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that they will hopefully look very hard
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at this problem realize that having the
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R&B as a reserve currency is a very
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important thing in the long run for
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China and that they will then go about
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dismantling these exchange controls and
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having it float but we're a long way
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from there unfortunately we'll have to
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be very patient I guess thank you very
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much thank you Jeff
