What It Means for the U.S. Economy and Financial Markets
The panelists were Steven Dunaway, consultant and macroeconomic analyst and former deputy director of the Asia and Pacific Department at the IMF; Pietra Rivoli, deputy dean and professor of Finance at Georgetown UniversityaEUR(TM)s McDonough School of Business; Art Steinmetz, chief investment officer and portfolio manager at OppenheimerFunds; and Phillip Swagel, Milken Institute senior fellow and professor at the University of Maryland School of Public Policy. Reena Aggarwal, McDonough Professor of Business Administration and professor of Finance at Georgetown UniversityaEUR(TM)s McDonough School of Business, moderated the panel.
The panelists ultimately concluded that the prospects are brighter for a market-oriented transition in China than for political liberalization, but they suggested that reform on both fronts will be slow and uneven. To achieve economic aEURoerebalancing,aEUR? China will need to promote a number of policies that increase domestic consumption in the near term and that liberalize its currency regime. The panelists also discussed various policies that the U.S. should pursue to affect and benefit from ChinaaEUR(TM)s transition from an export-led economy to one based on greater domestic consumption.
Panelists discussed various policy approaches for hastening and smoothing ChinaaEUR(TM)s transition to a more market-based economy. The first is a need to float the exchange rate, though one panelist noted that the renminbi is close to equilibrium value, having risen more than 20% in the last five years. One panelist surmised that it would only fluctuate between five and ten percent after liberalization. Second, China could liberalize other capital controls and increase debt transparency. Finally, China could remove the ceiling on bank deposit rates, allowing for more competition between smaller banks and the aEURoebig 5aEUR? banks.
Panelists discussed other policies for increasing personal consumption to help China move away from an export-led economy. Allowing bank deposit rates to rise, noted above, could also work to increase disposable income by increasing returns on savings and expanding household wealth. Additionally, China could expand its social safety nets, thereby reducing savings rates and leaving more household wealth left over for domestic consumption.
The panelists were more circumspect about the potential for meaningful political change. A few agreed that even though Xi Jinping has traveled widely in the United States and served in the Fujian and Zhejiang provinces on the more cosmopolitan eastern coast of China, he will not drastically depart from the opaque internal policies of Hu Jintao. Indeed, the panelists thought the new leadership will have similar political perspectives as the old.
The panelists were especially concerned about potential military or political flashpoints. For example, there could be a potential turn toward nationalism if economic growth slows and border disputes arise with Japan. They were also concerned about the resource-rich South China Sea, the Taiwan Strait, potential conflict on the Korean Peninsula, and the potentially destabilizing movement of rural Chinese peasants to cities. These could all hinder or even prevent further political transition.
U.S. Policy Options:
The panelists discussed the effects of ChinaaEUR(TM)s economic transition on the United States and policies the latter should adopt to maximize benefits and minimize downside risk. One panelist noted that ChinaaEUR(TM)s transition to a domestic consumption-led economy will reduce its growth to 5-7%. While this will be a drag on the global economy, it will also benefit U.S. exporters, who would ship more goods to satisfy increased demand in China.
Another panelist suggested that even though ChinaaEUR(TM)s domestic demand would increase, the United States would still retain significant leverage over China based on its role as the largest importer from China. This is especially true considering the decreased demand from the European Union.
Based on this leverage, the panelists suggested that U.S. policymakers should:
• Continue to emphasize the opportunity for China to float its exchange rate
• Liberalize U.S. high-skilled immigration policy to attract talent leaving China in a time of volatile transition
• Use its leverage to persuade China to play a constructive role in global security
• Take the lead on the Trans-Pacific Partnership, the potential free trade agreement to further liberalize commerce in the Asia-Pacific region, and
• Engage constructively on Intellectual Property protection as China gains an incentive to guard IP as it climbs the value-add ladder.
These actions would allow the U.S. to benefit from transition in China while furthering constructive liberalization.