The China Debate

CAMBRIDGE: The growls between China and Taiwan have grabbed the world's attention recently, but China's economy is poised to retake center stage. World Bank chief economist, Joseph Stiglitz has called on China to pursue a beggar-thy-neighbor strategy, never mind that China is a trade surplus country, has large reserves, little debt, and grows at more than 7%. Is Mr. Stiglitz's devaluation the answer to China's current troubles and is it a good idea for the world economy? No.

Large countries cannot expect to recover economically at the expense of the rest of the world; they need to find ways to boost their own domestic demand. Budget deficits and printing money, effective in the short run, provide only limited answers. Tung Tsu in the Art of War instructs commanders: "When encircled in deep ground, break out!" Good advice for China's leadership today. With its huge state enterprise sector and pervasive restrictions on just about anything, China has only one option: radical transformation of its economy.

Chinese devaluation rumors abound and the most common view is that sometime next year one is inevitable. Of course, this won't take place before the 50th anniversary of Mao's revolution this October, but expect it soon afterwards. The continuing focus is the lack of growth in China -- it has fallen to "only" 7.1% -- along with deflation, the lack of confidence on the part of households who will feel the impact of the formidable restructuring problems in state enterprises, and the loss of international competitiveness. If big budget deficits don't do enough to get growth back to where China's leaders want it, and monetary policy will not do the trick, why not try devaluation?

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