Chinas Policy Shift
Clash With US Looms Large Over Exchange Rates
The Chinese economy has performed better than any other economy around the globe. It enjoyed the world's highest growth rate of 8.7 percent last year, recovering from the unprecedented global economic crisis. It is a surprise that China has emerged as the world's third-largest economy in a short period of time. The country's breathtaking pace of industrialization and growth has been attributed to its export-oriented policy. But now, it is seeking to reduce its heavy dependence on exports and increase domestic demand as a new growth engine.
It is natural that China put more stress on domestic demand than on exports during the annual session of the National People's Congress (NPC), which ended Sunday. The move was construed as a shift in China's economic development model. But for now, it is hard to expect a sudden change overnight. Rather, the nation is likely to transform its model gradually to boost domestic consumption. This step is certainly an inevitable option to rectify the side-effects of the export-driven strategy.
It can be said that the time is ripe for China to turn its eye toward the domestic side, especially when the reverberating worldwide turmoil is sapping the growth of foreign trade. The country is feeling the limits of its export-triggered formula that is feared to escalate tensions with the United States and other advanced economies over a global imbalance. In this regard, more focus on domestic consumption could help China avoid potential trade frictions with those countries. It is also intended to promote balanced development between cities and rural areas and narrow the widening rich-poor gap.
On the other hand, the United States is moving in the opposite direction with President Barack Obama pledging to double American exports in the next five years. It is really interesting to see the mammoth consumer market trying to turn into an exporter, while the so-called factory of the world is looking inward to tap the potential power of 1.3 billion consumers. It is also worth noting that last Thursday, Obama called on China to adopt ``a more market-oriented exchange rate" to help rebalance world growth.
The call is nothing but a request for China to raise the value of its currency, the yuan, against the U.S. dollar to boost American exports and reduce its trade deficit with the Asian giant. But Chinese Premier Wen Jiabo rejected the U.S. demand in a press conference at the end of the NPC session. He said that the U.S. bid to increase exports through tweaking the exchange rates was ``protectionist." More worrisome is that the rejection might set off a currency war between the two countries, often referred to as the G2.
The Treasury Department is scheduled to report to Congress by April 15 whether China qualifies as a ``currency manipulator." China may face U.S. sanctions on its goods if it is on the manipulator list. In that case, the currency dispute would turn into a trade war, reviving the specter of protectionism. It is imperative that China and U.S. solve this thorny issue through international cooperation to avoid the worst-case scenario that might bring unpredictable consequences to the whole world.