Deficit result of low savings, high consumption
BEIJING: A top government policy adviser has said the value of the Chinese currency is not the reason for the US trade deficit, and that Washington should restructure its economy if it wants to improve its trade balance.
"The yuan's value is not the cause of the US deficit, which is actually caused by its defective economic structure," Xia Bin, economist and counselor of the State Council, told China Daily on Tuesday.
With the US economy still bogged down and unemployment remaining high, US industry and legislators are pressuring the Barack Obama administration to get tough with China.
On Monday, 130 US law makers sent a letter to Treasury Secretary Timothy Geithner and Commerce Secretary Gary Locke, demanding tough action against China for its "manipulation of currency".
A day earlier, Paul Krugman, a Nobel Prize winner in economics, also accused China of keeping the yuan's value artificially low to benefit its exports, although most Nobel laureates in economics, such as Robert Mundell, do not agree.
The US trade deficit is mainly a result of its low savings and high consumption rates, and the fact that its manufacturing capacity has mostly shifted overseas, such as China, said Xia, also director of the Financial Research Institute of the State Council's Development Research Center.
"It has few products to export" and among the few it can sell overseas, it has blocked exports of high-tech products to China, he said.
In the 1980s, when the US ran a huge trade deficit with Japan, Washington forced the Asian power to drastically revalue the yen. But the US trade balance did not improve and "it is clear that a rising yuan will not help US exports", Xia said.
Economists agree that the role of the currency is diminishing in a country's trade balance, he added.
Even if the yuan were revalued by 10 or 15 percent, "will the US current account deficit all of a sudden become positive? It simply isn't true," said Robert Pozen, senior lecturer at Harvard Business School. "It would help just a little."
Xia also said that Beijing will not dump its holdings of US treasuries as a means to counterbalance pressure from Washington, because it would cause chaos in the global economy and the international markets.
"China is a responsible player," he said.
Responding to Krugman's proposal of imposing a surcharge of up to 25 percent on Chinese exports, Xia warned that it would only backfire by causing high inflation in the US.
Bi Jiyao, senior researcher at the National Development and Reform Commission, the top economic planning authority, said the US government will think twice when it comes to deciding whether to put China on the currency manipulators' list.
"Doing that, as they can see clearly, is tantamount to starting an all-round trade war," he said. "Is that what the Obama administration wants? I doubt it."
Analysts also said that Krugman's remarks combined with the move by US legislators reflect the country's strategy to fan up the issue of an "undervalued yuan" to increase exports.
Zhang Xiaojing, senior economist at the Chinese Academy of Social Sciences, said Krugman is trying to influence government policies by creating a myth that the renminbi is the root cause of global imbalances.
"It is for the purpose of boosting their own economic growth that US politicians and academics collaborate with each other in spreading such messages around the world."
Bi added that "China must be on the alert against the influence of such lobbying forces".
If the Obama administration follows Krugman's advice (forcing Beijing to revalue its currency by naming China a currency manipulator and launching a trade war), the world economy would be much worse off, said Huang Yiping, a professor at Peking University, said.
"I am a strong advocate of greater exchange rate flexibility in China. But I am strongly opposed to finger-pointing and confrontation in dealing with exchange rate policy and global imbalances," Huang said.
Even as the US accuses China of manipulating its currency, its own role in monetary history has been cast into doubt, said Liam Halligan, UK-based economist and commentator, pointing out that the US has a history of currency manipulation.
"The reality is that America's 'weak dollar' policy - its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debt - amounts to the biggest currency manipulation in human history," he said on Saturday in the Daily Telegraph.
Li Xiang contributed to the story.
