The Economics of Asian Currency Policy, Exports and Investments
China’s recent maneuvers in the currency markets have caused much speculation in the world’s financial circles, but this does not spell a bleak scenario for the global market, according to economist Milton Ezrati.
Milton Ezrati, Senior Economic Strategist at money management firm Lord Abbett, spoke on October 18 before Fletcher students, mostly from the international business and economics fields, about the global effects of China’s currency and investment policies and growing export-oriented economy.
Ezrati said China has “taken a page” from the Japanese model of currency policy by “keeping its currency, the yuan, undervalued as compared to the U.S. dollar, thus making its export goods attractive to consumers worldwide, particularly Americans, and securing a favorable trade balance vis-a-vis the U.S.”
He explained that China’s strategy is to maintain a constant supply of dollars while keeping the yuan in short supply, to create increased demand. Ezrati added that the Chinese government would then invest its dollars in acquiring real estate and other properties in the U.S., citing, in particular, its recent bids to purchase American companies Maytag and Unocal.
“Indirectly, then, China is lending money to the U.S. to enable it to buy its imports from China,” he said.
Ezrati went on to say that in July of this year, China adopted a “cosmetic change” when it decided to float the value of the yuan instead of pegging it to the dollar at a fixed rate.
“It was cosmetic in the sense that China never ceased managing the value of the yuan”, he said, emphasizing that he is not disparaging the Chinese strategy. “It is a legitimate development strategy. In the end, the U.S., which is one of the world’s biggest consumer markets, gets a lot of cheap imports.”
Ezrati said that China’s primary rationale for its economic policies is its disparate need to create jobs for its 750 million-strong labor force, 40 per cent of whom are in the farming sector. China has to create at least 1 million jobs per month to avert massive unemployment, according to Ezrati.
However, Ezrati noted that job creation is not the sole motivation. “China is not just an economic [power] but is also a political and military power in the world. It will only liberalize its markets to a certain extent. After all, it is still a controlled economy,” he said.
“The Chinese strategy of undervaluing its currency will only change if China is able to develop its own domestic market and no longer has to depend on the U.S. market to consume its goods,” Ezrati said.
Alex Colosivschi, a first-year MALD student, inquired about the long-term risks faced by the global economy as a result of China’s strategy.
Ezrati replied by saying China sees the U.S. as the market and Europe as the competitor. He said the euro is bearing the brunt since it is unable to compete with China in terms of production, while the U.S. is incurring a huge trade deficit with Asia. Ezrati continued by noting the recent Asian financial crisis also resulted from China’s currency strategy since most countries in the region peg their currencies to the U.S. dollar.
However, Ezrati speculated that while the U.S. stands to suffer a tremendous recession in the long-run, it is unlikely that it will revise its trade policies with China anytime soon.
“At this point, because of the impact of events like Hurricane Katrina on the U.S. economy, the government’s priority is to forestall inflation and maintain the prices of goods low in order to keep American consumers happy,” he said.
