Global Growth Requires Strong Yuan As China Shifts To Domestic Growth
April 26,2010
As the global economic recovery continues to strengthen, growth in the U.S. and wealthier nations in Europe may depend on a depreciation of their currencies compared to China and other developing countries.
The International Monetary Fund’s chief economist, Olivier Blanchard, says that as wealthy nations rein in stimulus spending, “demand may be weak and [as would] net exports.”
This would imply an appreciation of emerging market currencies relative to advanced countries’ currencies.
Mr. Blanchard had China specifically in mind.
The IMF’s semi-annual World Economic Outlook repeated the IMF’s view that the Chinese yuan is “substantially” undervalued. Mr. Blanchard said that allowing the yuan to strengthen would help Beijing shift to more domestic-led growth and reduce the chances that the economy would overheat. “An appreciation of the currency, appears highly desirable on its own,” he said.
The IMF, U.S. and European nations have long been pressing China to revalue its currency, and Beijing has long resisted the move. But in recent weeks, the U.S. and China have given signals that a small revaluation may be in the works.
Overall, the IMF lifted its forecasts of global growth to 4.2% in 2010, up from the 3.9% projection given in January. In 2011, the IMF expects growth of 4.3%—a bit slower than average global growth before the financial crisis hit hard in 2007. But the speed of the recovery varies greatly by region.
Developing countries are expected to grow at a 6.3% pace this year and 6.5% next year. As usual, the star performers are expected to be China with growth of 10% this year and 9.9% in 2011, and India, whose growth rates is expected to be 8.8% in 2010, followed by 8.4% next year.
That’s a far more rapid clip than what the IMF terms “advanced economies”—essentially the U.S., Europe and Japan—which are projected to grow 2.3% in 2010 and 2.4% next year. In that group, the U.S. is expected to grow 3.1% in 2010 and 2.6% next year, while the 16 euro-zone nations are expected to struggle along at a 1% clip this year and 1.5% next year. Japan is expected to grow 1.9% this year and 2% in 2011, the IMF said.
The fragility of the recovery in most advanced economies suggests that they should continue with already-planned fiscal stimulus measures this year. By next year, the IMF figures that recoveries could become self-sustaining so many countries could begin “significant” reduction in deficits, even as monetary policy remains easy. The IMF didn’t give specific advice about which countries should reduce fiscal stimulus next year—or how deeply.
But the IMF is clearly worried about rising debt levels choking off recoveries by boosting interest rates for governments, banks and other commercial borrowers.
Debt levels in advanced economies are projected to top 100% of gross domestic product in 2014 based on current policies, up 35 percentage points from before the crisis. Bringing that back down below 60% of GDP by 2030 would require budget cuts of eight percentage points of GDP by 2020, and maintaining that level for the next decade.
Withdrawing stimulus, would only accomplish a spending reduction of 1.5 percentage points of GDP. Thus, more drastic fiscal measures are needed, from cutting discretionary spending and broadening the tax base to tackling longer-term entitlement costs, the IMF said.
[The Wall Street Journal contributed to this article]mg
April 26,2010
As the global economic recovery continues to strengthen, growth in the U.S. and wealthier nations in Europe may depend on a depreciation of their currencies compared to China and other developing countries.
The International Monetary Fund’s chief economist, Olivier Blanchard, says that as wealthy nations rein in stimulus spending, “demand may be weak and [as would] net exports.”
This would imply an appreciation of emerging market currencies relative to advanced countries’ currencies.
Mr. Blanchard had China specifically in mind.
The IMF’s semi-annual World Economic Outlook repeated the IMF’s view that the Chinese yuan is “substantially” undervalued. Mr. Blanchard said that allowing the yuan to strengthen would help Beijing shift to more domestic-led growth and reduce the chances that the economy would overheat. “An appreciation of the currency, appears highly desirable on its own,” he said.
The IMF, U.S. and European nations have long been pressing China to revalue its currency, and Beijing has long resisted the move. But in recent weeks, the U.S. and China have given signals that a small revaluation may be in the works.
Overall, the IMF lifted its forecasts of global growth to 4.2% in 2010, up from the 3.9% projection given in January. In 2011, the IMF expects growth of 4.3%—a bit slower than average global growth before the financial crisis hit hard in 2007. But the speed of the recovery varies greatly by region.
Developing countries are expected to grow at a 6.3% pace this year and 6.5% next year. As usual, the star performers are expected to be China with growth of 10% this year and 9.9% in 2011, and India, whose growth rates is expected to be 8.8% in 2010, followed by 8.4% next year.
That’s a far more rapid clip than what the IMF terms “advanced economies”—essentially the U.S., Europe and Japan—which are projected to grow 2.3% in 2010 and 2.4% next year. In that group, the U.S. is expected to grow 3.1% in 2010 and 2.6% next year, while the 16 euro-zone nations are expected to struggle along at a 1% clip this year and 1.5% next year. Japan is expected to grow 1.9% this year and 2% in 2011, the IMF said.
The fragility of the recovery in most advanced economies suggests that they should continue with already-planned fiscal stimulus measures this year. By next year, the IMF figures that recoveries could become self-sustaining so many countries could begin “significant” reduction in deficits, even as monetary policy remains easy. The IMF didn’t give specific advice about which countries should reduce fiscal stimulus next year—or how deeply.
But the IMF is clearly worried about rising debt levels choking off recoveries by boosting interest rates for governments, banks and other commercial borrowers.
Debt levels in advanced economies are projected to top 100% of gross domestic product in 2014 based on current policies, up 35 percentage points from before the crisis. Bringing that back down below 60% of GDP by 2030 would require budget cuts of eight percentage points of GDP by 2020, and maintaining that level for the next decade.
Withdrawing stimulus, would only accomplish a spending reduction of 1.5 percentage points of GDP. Thus, more drastic fiscal measures are needed, from cutting discretionary spending and broadening the tax base to tackling longer-term entitlement costs, the IMF said.
[The Wall Street Journal contributed to this article]mg