by C. Fred Bergsten, Peterson Institute for International Economics
Letter to the Editor of the Financial Times
April 22, 2009
© Financial Times
William Jacobson and Ernest Preeg raised a key question about my thesis, "We Should Listen to Beijing's Currency Idea" (April 8), in their letters of April 13. Both argue that the world should not relieve China of the currency risk emanating from the huge dollar hoard it has accumulated by running massive current account surpluses for the past five years, including by maintaining a substantially undervalued exchange rate for the renminbi.
I fully share their concern over China's major role in the continuing global imbalances, which were an important cause of the current crisis, as indicated in my article. Two practical considerations compel me nevertheless to support the proposal by Zhou Xiaochuan, the People's Bank of China governor, to create a substitution account at the International Monetary Fund. China and other monetary authorities could convert their dollars via this account into Special Drawing Rights through off-market transactions that would have no effect on exchange rates or any other economic variable.
The first is that the fear of further capital losses on its dollar reserves clearly does not deter China from currency intervention to support its large external surpluses. It has already experienced considerable losses, only part of which have been reversed, as the dollar slid substantially from early 2002 to early 2008 and heavy intervention continues. One suspects that the Chinese authorities view these costs as inevitable consequences of the subsidies they provide to exports and jobs via the exchange rate. We cannot force or even induce them to adjust by jeopardizing their asset valuations.
The second and more operational consideration is that circumstances could easily arise in domestic Chinese politics under which the authorities felt compelled to dump large portions of their dollar holdings, despite the severe disruption that could result for the world economy. Such conditions could occur if the US Congress were to pass, or even severely threaten, protectionist legislation against Chinese exports (notably including their currency driver) or if there were a renewed flare-up in the Taiwan Straits or over the Dalai Lama. It would greatly behoove the United States and the world economy as a whole to provide an alternative disposition for China's unwanted dollars, especially since it could be done at very little or no real cost, rather than risk the very unpleasant consequences of such a scenario.
Policy Brief 14-16: Estimates of Fundamental Equilibrium Exchange Rates, May 2014 May 2014
Policy Brief 14-17: Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do June 2014
Policy Brief 13-28: Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis November 2013
Op-ed: Unconventional Monetary Policy: Don't Shoot the Messenger November 14, 2013
Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013
Working Paper 13-2: The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances March 2013
Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?
Revised August 2013
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Working Paper 12-4: Spillover Effects of Exchange Rates: A Study of the Renminbi March 2012
Book: Flexible Exchange Rates for a Stable World Economy October 2011
Policy Brief 10-24: The Central Banker's Case for Doing More October 2010
Policy Brief 10-26: Currency Wars? November 2010
Book: Debating China's Exchange Rate Policy April 2008