So, I’m not alone in worrying about a Chinese monetary policy that may prove destructive.  In fact I am in rather good company.  On Friday (October 23rd),  - note several days after my blog post, ‘From Me to You’ - Solving the World’s Global Imbalances, Paul Krugman in his NYT Op-ed, “The Chinese Disconnect,” raised the same worry and summarized the same concern that Bernanke, US Fed Chairman, raised over the yuan/dollar exchange in his speech on Asia in San Francisco. As Krugman suggested – putting words in Bernanke’s mouth, “China’s bad behavior is posing a growing threat to the rest of the world economy.  The only question now is what the world – and, in particular, the United States – will do about it.”

 Now as Krugman pointed out, it is not necessarily a bad thing for a country, especially one that is relatively poor and with a relatively weak financial system that could be damaged by hot money to maintain tight control over its currency. But the target value is critical.  Earlier in the last decade a glance and China’s trade account shows that the trade remained relatively in balance.  But the soaring trade surplus since the especially with the United States, has in Krugman’s words, “keeping the yuan-dollar rate fixed came to look increasingly bizarre.”  And as Krugman reflects on current Chinese policy, “But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.”

The current situation is that China’s policy is driving a major devaluation even when it maintains a significant trade surplus and a rapidly recovering economy, which in other circumstances likely would be leading a major yuan appreciation. As Krugman concludes, “By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere.”  For Krugman this policy direction is a beggar-thy-neighbor policy and the global governance community should be speaking up. 

It sounds awfully quiet right now.

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