World Crisis Online

By CSC staff, Shanghai From Beijing to Shanghai, then on to Guangzhou, a week’s whirlwind trip across China by Paul Krugman, the 2008 Nobel laureate in economics, carried great expectations. It was hoped that the master would predict the future of the global economy, as well as offer inspiration for the Chinese from a strategically lofty position after feeling the pulse of China’s economy.

To the disappointment of his Chinese fans, the only prediction Krugman made was that the RMB won’t approach internationalization until “after his death–40 or 50 years later.” Many Chinese have thought, wishfully, perhaps, that the financial crisis would be a good opportunity for RMB to achieve the great leap forward, as well as for the retirement of the USD from its privileged position as the international reserve currency.

The man, who has been said to have predicted the 1997 Asian financial crisis and the 2008 global financial tsunami, is regarded as a great prophet in China.

As is common when economists are allowed to pontificate, Krugman’s speech did not provide plentiful suggestions for the development of China’s economy, but did point out many of what he saw as its shortcomings. The New York Times columnist, who has fiercely criticized the Bush and Obama administrations and Wall Street, again disappointed his fans by not flaying the US for triggering the financial crisis. On the contrary, he used his bully pulpit to lay not a little of the blame on China’s huge trade surpluses, which, as he certainly intended, led to a heated debate with Chinese scholars present at the meeting.

Before the London G20 summit, China’s Central Bank Governor Zhou Xiaochuan had put forward a proposal that a new international reserve currency, separated from any sovereign state, should be set up, and that perhaps the role of the IMF’s SDR (Special Drawing Rights) should be given full play in particular. Krugman, in an article, titled China’s Dollar Dilemma, wrote to refute that view. Before his first visit to China, these remarks infuriated many Chinese scholars.

In a presentation at Shanghai Jiaotong University, Krugman said: “If the unemployment rate remains high in the US and the euro zone while China maintains a high trade surplus two years later, China will be regarded as a trouble maker.”

Krugman also hinted that China’s massive trade surplus is the result of manipulating its currency’s exchange rate. He said: “The U.S. Congress will review China’s currency each year, and the Treasury will report whether some countries are manipulating currency or not. The answer each time is that China doesn’t manipulate, but everybody knows this is not an honest assessment, it’s a decision made to avoid conflicts.”

Xia Bin, director of the Institute of Finance of the State Council Development Research Center, argued that China’s is a long-term approach of expanding domestic demand and stimulating consumption for China.

Xia Bin added, “Why do US mainstream economists always lead us to discuss the issue of Sino-US trade? Why don’t they guide the intellectual to the study of how to restructure the current international monetary system?”

In a speech in Beijing, Krugman said: “That RMB is not freely convertible and maintaining its status as a weak currency is the result of China’s monetary policy.” He was referring to China’s huge holdings of USD as a means of maintaining an undervalued, non-convertible currency, pegged to the dollar.

Long Yongtu, the Secretary-General of Boao Forum for Asia, argued: “Among all countries in the world, some maintain their own non-convertible currency and some decide not to open their capital markets. If Mr. Krugman believes that those who choose to practice non-convertibility are manipulating the exchange rate, China and many other countries are doomed to manipulate exchange rates forever.”

Many in the Chinese media criticized Krugman’s defense for the US dollar: “The U.S. dollar is your currency, but it’s our problem.”

Krugman said: “No one has required you to establish your foreign exchange reserves based on US dollars. There is also the euro, Japanese yen, why doesn’t China choose one of them? It is China’s foreign exchange reserve officials who should answer this question. This has been a decision of the Chinese, not Americans.” He pointed out to Chinese scholars and the audience, many of whom think the US government should guarantee China’s foreign reserve assets, that it is not the responsibility of the US to safeguard the security of foreign countries