Prof. Yao Yang, Professor and Deputy Director of China Center for Economic Research of Peking University, Editor of China Economic Quarterly, presented his essay "Are Global Imbalances Curable?" on the morning of Nov. 7th in the Economics session of 2009 Beijing Forum. Xiang Yunke, reporter from PKU English News Website, was able to interview Prof. Yao Yang on his view of trade imbalances and the ongoing financial crisis.

R — Reporter from PKU English News Website
Y — Prof. Yao Yang 

R: You mentioned that the static financial markets in the surplus countries might also be a cause of the financial crisis. What do you think is China's role as a surplus country in the origin of this crisis?

Y: China's underdeveloped financial markets play an important role for China to run high current account surpluses because they have not done a good job in fully utilizing the savings provided by exports.

China was not a direct contributor to the financial crisis, but to the extent that excessive liquidities did provide the soil for the crisis, China was part of it. Saying that China had nothing to do with the crisis is not correct. At least, China is part of the global imbalances from which the crisis emerged.

R: Do you think China's surge in trade and current account surpluses happened because RMB is still undervalued, under which circumstances, the 20% appreciation has only eased the situation that could have been a bigger surge?

Y: I do not think that RMB undervaluation was a big deal for China's current account surplus - indeed, I do not believe that RMB is grossly undervalued. I have a study showing that RMB was not much undervalued by June 2008. In terms of the relationship between the exchange rate and current account surplus, we need to look at the real exchange rate instead of the nominal exchange rate. Even a country has a fixed nominal exchange rate, its currency will have real appreciation when it runs large current account surpluses - that is, its domestic price level will rise - and then its exports will lose competitiveness, at least in the medium and long run. China's current account surplus has to be explained by other real factors, like demography, factor market distortions, and China's strong manufacturing capacities.

R: Is there a way that China could make better use of its foreign exchange reserve than constantly investing in US Treasury bond?

Y: A kind of Marshall Plan is a good option.

R: If SDR is a possible solution to the imbalances, China can buy the specified amount of different kinds of foreign currencies implied by SDR. But why China is in fact not doing it right now?

Y: China holds a large reserve in USD so it is impossible for it to buy other currencies. SDRs allow China to exchange USD for SDRs. However, either IMF or the World Bank has to find profitable investment opportunities using the SDRs; otherwise it is no use for China to buy SDRs, nor will it help reduce global imbalances.

Edited by: Seren