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November 25, 2004
China puts US in its place
This report in the Financial Times says that China's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment. Li Ruogu, the deputy governor of the People's Bank of China, warned the US not to blame other countries for its economic difficulties.
The US has been putting a lot of pressure on the Chinese to revalue their currency. In response Li says that America's trade deficit of 6 per cent of GDP is not sustainable. Then he adds:
"The appreciation of the RMB (Chinese currency) will not solve the problems of unemployment in the US because the cost of labour in China is only three per cent that of US labour. They should give up textiles, shoe-making and even agriculture probably.They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.”
No doubt the US Treasury will thank the Chinese for this insight and advice.
Maybe our federal Treasurer, as a good IMF man, should enter the international economic debate and start tell his American friends a few truths about prudent economic management.
John Snow, who runs the US Treasury, would listen to a loyal servant, would he not?
Meanwhile the $US continues to slide. The Russian central bank is now hinting that Moscow would step up its ongoing policy of shifting more of its $113.1bn of foreign exchange reserves from dollars into euros. Will the Japanese diversify their reserve holdings to protect against a dollar fall? How long can the Bretton Woods system depend on the dollar reserve accumulation game?
General Glut's Globbog has more. So does Rob over at Blogorrhoea
Update
There has been a relative silence in place about the policy implications of the $US dollar fall. Does this reflect a faith in orderly market adjustment? Or an agreement being reached at the G20 that Asia would allow its currencies to appreciate against the dollar? We know so little about the governance of international currency markets.
I would suspect that the recent slide in the dollar would also provoke widespread discussion in China about the possible losses being suffered, due to the country’s enormous foreign exchange reserves. (China has a $50 billion or so current account surplus and its reserves rose from US$496.2bn to US$514.5bn.) Are the Chinese quietly reducing their holdings in $US to encompass a greater euro weighting ? When will China break its current dollar peg?
The other policy consideration, as Brad Setser observes, is the need to intervene to prevent the siphoning away of growth by the undermining exports from currency revaluation. According to Brad DeLong European leaders have begun worrying openly that the dollars fall and the rise of the euro might damage their export-driven economic recovery.
The same situation applies in Australia.
Posted by Gary Sauer-Thompson at November 25, 2004 07:28 AM
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Comments
If the U.S. gave up agriculture, what would the Red states do?
Textiles and shoes are pretty much all done in Asia now anyway, so I guess it's time to start selling rocket technology to China.
Posted by: Greg at November 25, 2004 03:05 PM