Engler, Laffer, Kudlow on China Trade

By August 3, 2007Trade

Spirited, interesting exchange Thursday evening on CNBC among Larry Kudlow, Arthur Laffer and NAM President John Engler on China currency legislation. Video here.

Kudlow’s previous blog post on the topic: “China Bashing Baloney.”

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  • Stacy says:

    Over the past few years, the rising trade surplus means that the People’s Bank has been a continual net buyer, accumulating nearly $30 billion a month in official foreign reserves for a cumulative total of $1.2 trillion as of March 2007. This fact has led to criticism that China consciously set the yuan peg at a level that makes exports hypercompetitive and thus automatically generate enormous trade surpluses. But this doesn’t necessarily follow. Under a fixed exchange-rate regime, central banks essentially commit to live with what the market delivers to their doorstep, and in a technical sense the recent flood of dollars is simply what the market has brought to China.
    In fact, when looking at policy intent it helps to keep two points firmly in mind. First, when the government first initiated the peg in 1997 it wasn’t to keep the yuan from rising. Rather, it was to keep the currency from collapsing. The end of the Chinese bubble in 1995-96 left the economy with a huge burden of bad debts at home and abroad: Profits were disappearing and real growth had probably slowed to low single-digit levels. Against this backdrop, the onset of the Asian financial crisis convinced many investors that the yuan would be the next domino to fall, and short-term capital began to flow out of the economy at an unprecedented pace. The authorities’ decision to institute a de facto peg against the dollar was explicitly billed as a commitment not to devalue the yuan. As late as 2003, when then Premier Zhu Rongji officially retired from government service, he considered holding the yuan peg to be one of his crowning achievements, and one of China’s biggest contributions to global stability.
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