Cost of unleashing China's currency

Congress: Be careful what you wish for.

from the July 13, 2007 edition

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While China's share of the US trade deficit increased (from the previous peak of 27 percent in 1997 to 28 percent in 2006), the share of the rest of East Asia actually fell (from 43 percent in 1997 to 17 percent in 2006). America's trade problem with Asia has become proportionately smaller, but a superficial understanding of China's numbers makes it appear worse.

Third, China has experienced an explosion of credit, investment, and productivity. Banks had a lending frenzy that the Hu Jintao administration was slow to control. And China's privatization of urban housing and numerous state enterprises freed up large amounts of money for investment.

Simultaneously, the restructuring and privatization of China's inefficient state enterprises led to drastic improvements in manufacturing productivity and thus in China's competitiveness. There is no way that currency appreciation could have compensated for China's phenomenal productivity growth since 2001.

China's undervalued exchange rate is primarily China's problem. It creates too much domestic liquidity in China, which is driving potentially dangerous stock market speculation and other bubbles. The US Treasury Department is correct in trying to persuade China to marketize its currency faster on the basis of Chinese interest rather than foreign pressure.

While often well-intentioned, proposals to protect the US economy from foreign goods can backfire. A more protected US economy would be, like France's, an economy of far higher unemployment.

• William Overholt is director of the Center for Asia Pacific Policy at the RAND Corporation, a nonprofit research organization. Pieter Bottelier, former chief of the World Bank Resident Mission in China, is a professor at the Johns Hopkins School of Advanced International Studies.

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