The meeting between Presidents Obama and Xi in Palm Springs over the weekend presented another opportunity to berate China for its international economic imbalances, but the two presidents sensibly found more fruitful things to talk about.
It's getting harder to find fault in China's interaction with the international economy. Is China getting close to becoming Robert Zoellick's 'responsible stakeholder' in the world economy?
China has routinely been accused of using an export-promoting strategy to foster its own growth at the expense of others. This was true until five years ago, but times have changed. The current account surplus has fallen from over 10 per cent of GDP in 2007 to less than 2 per cent this year. For comparison, Germany's external surplus is more than 6 per cent of GDP. The contribution that net exports make to growth (the increase in exports less the increase in imports) provides a more precise measure: this has been negative for the past five years.
Some persuasive voices in Washington are still ready to find fault. Fred Bergsten, until recently head of the influential Peterson Institute, still sees China's reserve increases as the principal cause of America's slow recovery. Currency manipulators like China have, he claims, cost America one to five million jobs. His specific gripe is that the renminbi exchange rate is not allowed to float freely. In his view, any reserve increase, no matter how small, transgresses against free market principles.
But his colleagues at Peterson have just updated their respected measures of international competitiveness and find the renminbi to be only slightly undervalued. Over the past five years or so, the real exchange rate (i.e. adjusted for relative inflation rates to get a measure of international competitiveness) has appreciated by around 25 per cent. If competitiveness were to be measured by relative wages rates, the fall in competitiveness would be greater still.
Even in mature markets, exchange rates can depart substantially from fundamentals. It's hard to criticise China for moving cautiously to open its capital account and let the exchange rate float freely, especially in a world where abnormal monetary settings are distorting exchange rates.
Of course China still has plenty of economic challenges, but most of them are domestic. China still has a long way to go to achieve a sustainable internal balance, particularly between investment and consumption. This would balance have knock-on effects on the external position, but the main task on the way to achieving such balance is domestic income redistribution, not floating the exchange rate.
Looking back on China's economic interaction with the world over the past five years, there seems to be more to praise than to censure. China's growth accounts for perhaps 40 per cent of total world growth over this period. Without it, we would have experienced a very glum world indeed. With its command economy, China was able to deliver a huge domestic stimulus in 2009 (around 10 per cent of GDP; far more than any other country). China may yet pay a price for this credit stimulus, in terms of an over-extended financial sector. But in the meantime we have all had the benefit.
In past international discussions, China and its exchange rate have been the butt of trenchant criticism. Yet when we look back at the period leading up to the 2008 crisis and since, the mess many of the advanced countries got themselves into can hardly be blamed on China. The fatal external imbalance was not the one between China and the US, but rather between Germany and the peripheral euro states. The damaging capital flows were not those between China and the US but from Germany and France to the periphery of Europe.
When G20 countries next get together to discuss countries that are not acting as good international citizens, they might do better to turn their gaze elsewhere.
If the issue is large current account surpluses, huge foreign reserve holdings and heavily managed exchange rates, Singapore, Switzerland and a number of other countries transgress far more seriously than China. The country that could most help the world's excess saving problem is Germany. Berlin is running a current account surplus of more than 6 per cent of GDP and has a near-balanced budget with room for expansion which would not only enliven Europe's stagnation, but might even provoke some beneficial inflation.
America and the UK could help by easing up on their austerity. Japan needs to do more with its 'third arrow' (structural reform), with less flaying around by monetary policy in an attempt to achieve the inconsistent aims of lowering interest rates while simultaneously hiking inflation. Its successful engineering of a sharp fall in the yen must be borderline acceptable in international terms. It is a feeble excuse to say that policy wasn't really aiming to get the yen down.
This alternative agenda ought to be enough to ensure a lively international discussion, without taking up Bergsten's indictment of Chinese exchange-rate policy. But for all the opportunity for rich international discussion, the main task of sorting out the current slow recovery lies with domestic policy, not with correcting some perceived international imbalance.
Originally published by The Lowy Institute publication The Interpreter. Republished with permission.