Dr. Linda Yueh is Fellow in Economics at St. Edmund Hall, University of Oxford and an Associate of the Globalisation Programme of the Centre for Economic Performance at the London School of Economics and Political Science (LSE). Dr. Yueh is also the Director the newly launched China Growth Centre (CGC) at St Edmund Hall, University of Oxford, which is focused on researching economic and legal/institutional issues of importance to China and the world.
On the morning of Nov. 7th, Dr. Yueh presented her essay "U.S., China and Global Imbalances" in the Economics panel of 2009 Beijing Forum. Xiang Yunke, reporter from PKU English News Website, was able to interview Dr. Yueh after her presentation.
X - Xiang Yunke
Y - Dr. Yueh
X: How do you think the deflationary effect of China's export-oriented policy and the global imbalances has contributed to setting the stage for the crisis?
Y: I do not think China plays a major role. I think China has been a part of the shift in the global economy toward developing countries. China has helped to push down inflation, and has benefited everyone in the world, because every country has had low inflation and strong growth. And, that is very positive development. So, for the most part, the crisis part is because of financial liberalization in the United States and in Europe. I think China has suffered the consequences, and is part of a bigger structural shift, but is not the cause of the financial crisis. Looking at deflation, it is simply a part of the bigger structural change in the global economy, which has been very positive so far.
X: You mentioned "capital account liberalization and greater exchange rate flexibility" as recommendations for global re-balancing. What do you think are the pros and cons of this recommendation from China's perspective?
Y: It is positive for China in that if you have more capital account liberalization, you can allow your companies to "go global," and be competitive in the global market. And, there is a maturation of industry. So, China, about ten years ago, started to think about technology and allowing its firms to become global players. And this is the good time to do it because there are a lot of cheap assets in the West. Because of the credit crunch, there are a number of firms that need investment allowing Chinese firms to go and invest in. And, by doing that, what you do is export capital, and instead of buying up U.S. treasuries, you can buy Western equities. That is in a sense very positive.
The concept is that, if you want capital account liberalization, then you have to have exchange rate flexibility. If you have too much exchange rate movement, then there is a worry that the Chinese financial system isn’t developed enough to accommodate a lot of exchange rate movement. But, if you think about the high rate of corporate saving and the very competitive nature of the Chinese market, Chinese firms are ready to go out. And I think this is very positive development. And after a financial crisis, there is always an increase in mergers and acquisitions, because there are always lots of distressed assets which are good to buy. And you don’t have to buy Treasuries anymore.
X: Why does China keep buying US Treasuries?
Y: China buys Treasuries because when you have a current account surplus, you accumulate a lot of dollars, because you’ve sold a lot of goods and you’ve got a lot of dollars and also Euros, for instance. So instead of taking that surplus and buying treasuries (because you want to keep that reserve in the currency in which they are accumulated and don’t want to translate it into the domestic currency because it’s inflationary), you want to keep it in the original denomination. But you don’t have to keep it in US debt; you can keep it in US equities. It does not have to be US treasuries or bills. It can actually be investment, say FDI (Foreign Direct Investment). That’s what the Chinese government is now doing. And I think it is the right thing to do.
X: What are the most important lessons for the Federal Reserve and People's Bank of China in this crisis?
Y: I think the most important lesson for the US central bank is to consider the external impact of their interest rate decisions. Because monetary policy, when you are the world reserve currency, has to be set with an eye toward what’s happening around the world, as your interest rate and your currency are used around the world. So, I think the US central bank has to think about the external impact of its decisions. Even now, with the zero interest rate policy, the US could be fueling global liquidity which could lead to another asset bubble. They need to consider that.
For the PBoC (People’s Bank of China), I think it needs to think about how to reform interest rates to help reduce corporate saving and maintain stability at the same time. So, one of the reasons why interest rates are not fully liberalized is because the capital market is underdeveloped. So it is a way of maintaining stable development of the domestic capital market. However, if you do not liberalize interest rates, there are distortions in the capital market. Because interest rates are the internal rate of return (IRR) for investment, unless you have interest rates which reflect market conditions, you will get distortions. In China’s case, this has led to a high level of corporate saving, because there is not a capital market which allows firms to allocate capital efficiently both domestically and internationally. And, this is one of the consequences of partial liberalization.
Transcript by: Xiang Yunke
Edited by: Seren
