Olivier Blanchard, chief economist at the International Monetary Fund [IMF] has reassuring views about the prospects for an asset bubble in China and a revaluation of the yuan. Words: 632
Below are further edited excerpts from the original article* in which Dian L. Chu (http://dianchu.blogspot.com/) reports, interprets and comments on Blanchard’s remarks:
On China Bubble Concern
“We do not think so. For the most part, the growth in China, which has been very high, and is expected to continue, has been a healthy one,” said Blanchard, indicating that while there could be pockets of bubbles that the Chinese government is watching closely and ready to intervene when necessary and, as a result, the IMF is “not “terribly concerned about any major asset bubble in China”.
On Yuan Revaluation
Blanchard said the strategy of China is to increase domestic demand levels and decrease savings rate, which he believes is too high. As Beijing implements this process in order to re-allocate resources to the domestic sector, the Chinese currency–yuan or renminbi– will then be allowed to appreciate. He believes this is what we are going to see in the next few years.
For years the IMF has urged a rebalance, where advanced countries– such as the United States– may need to weaken their currencies to boost exports, while emerging economies like China need to allow their currencies to rise, curbing exports. There is a growing consensus among economists, however, that such a shift will not have significant impact on the trade imbalance. That is the main reason why J.P. Morgan economists estimate that a 10% trade-weighted appreciation in the yuan would reduce China’s overall exports by only 2%.
In the global race to increase countries’ export advantage to help recovery, most of the attention has focused on the need for China to appreciate the yuan to help drive Chinese domestic demand. From all indications, the most likely scenario is that Beijing will allow the yuan to gradually appreciate, albeit very modestly. The adjustment is unlikely to meet expectations as critics in the U.S. argue that the yuan is as much as 40% undervalued against the dollar. This no doubt will escalate global tensions and possibly create a trade war between China and the U.S.
The global economic recovery has drawn support from a swift rebound in China. It would be advisable for U.S. policy makers to weigh the long-term effect against the short-term benefit, since currency exchange rates aren’t the only factor to consider when it comes to China’s trade surplus.
On ‘Fiscal Consolidation’
Blanchard said fiscal consolidation must become a priority for heavily-indebted advanced economies but that is likely to further weigh on demand, and thus on economic growth. This has manifested itself more intensely in Greece, but eventually all countries will go through a similar process.
When it comes to “fiscal consolidation” among the advanced economies as warned by Blanchard, China’s growth prospect– among the best in the world– with its relatively low debt ratios, could certainly be one region with greater stability. While there will be some corrections in the medium term as Beijing tries to balance growth and inflation to curb potential bubbles these pullbacks should prove to be good entry points for long term investors.