January 17, 2011

Economist David Malpass on China’s Hu Visiting U.S.: AdvisorOne Interview

Hu’s visit to Washington highlights a changing economic reality

The future of the dollar and China’s expanded role as a global economic power to be reckoned with will be in the spotlight as Chinese President Hu Jintao meets with President Obama at the White House on Wednesday.

In a rare interview, Hu signaled in written responses to questions from TheWall Street Journaland TheWashington Post that China regarded the current dollar-dominated international monetary system as a “product of the past.”

For perspective on Wednesday’s summit meeting, AdvisorOne spoke with David Malpass (left), principal of economic consulting firm Encima Global and a former chief economist of Bear Stearns who has held senior positions in the Treasury and State departments. Malpass is the author of a recent policy paper on China’s growth outlook.

Is the yuan on its way to becoming an international reserve currency?

I don’t think the yuan will supplant the U.S. dollar, but it’s already being used more in cross-border trade, for example with Russia.

Does the U.S. want this?

The U.S. has encouraged China to make the yuan more convertible, meaning investors can buy it and sell it more readily.

So what’s the issue?

China has been moving in the right direction. So the issue is whether it could move faster. Recall that in the 1990s, several Asian countries made their capital accounts convertible, and that was one of the causes of the Asia crisis. They moved too fast toward convertibility without having the banking regulation in place [beforehand].

Does China now have those regulations in place?

China is not ready for full convertibility. Ireland wasn’t ready for the full convertibility provided by the euro because they didn’t have the banking regulations in place that were necessary. The banks took deposits in and made bad loans.

In a nutshell, what is China’s essential critique of U.S. monetary policy?

Greenspan had the rates too low, and Bernanke has the rates too low now.

What effect does that have on China and the rest of the world?

The U.S. pegged funds rate was exporting inflation. When the Fed sets the interest rates too low, or it does quantitative easing, it creates too many dollars and that creates inflation worldwide. That’s how oil got to $147 barrel [in 2008] — as a result of U.S. monetary policy.

Why does the U.S. want China to appreciate its currency?

Some in the U.S. think that will help create jobs here. But the markets perceive it as a weakening of the dollar — so they move capital to China and move jobs there.

The U.S. monetary policy has been harming the U.S. and harming China and it’s one of the topics of the upcoming meetings.

Reprints Discuss this story
This is where the comments go.