Roach Rebuffs Krugman Call to Pressure China on Yuan (Update2)

By Christopher Anstey and Susan Li
March 19 (Bloomberg) -- Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is "very bad" advice and that increased Chinese spending is a better way of reducing trade imbalances.
"We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong," Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. "We’re lashing out at China rather than tending to our own business," which is raising U.S. savings, Roach said.
"I’m a little surprised at Steve for saying that," said Krugman, the Princeton University professor and Nobel laureate in economics, in a telephone interview when asked to respond to Roach. "What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued."
The debate between the two economists echoes verbal clashes between the nations, with Chinese leaders repeatedly saying that their yuan policy isn’t the cause of the U.S. trade gap.
American lawmakers have urged the Obama administration to step up pressure on China for keeping its exchange rate unchanged, a stance criticized as providing an unfair advantage.

Yuan Stance

Premier Wen Jiabao’s government has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade. It allowed the currency to appreciate 21 percent in the three years before that.
The country has accumulated a record $2.4 trillion of reserves, and $889 billion of U.S. government debt, partly a consequence of its exchange-rate policy.
Global economic growth would be about 1.5 percentage points higher if China stopped restraining the yuan and running trade surpluses, Krugman said at an Economic Policy Institute event in Washington March 12. He said the U.S. may need to get more aggressive in its talks with China, perhaps by treating the exchange-rate as a countervailing duty or other export subsidy.
"I’m a little curious what Steve thinks would happen if the U.S. increased savings" without a stronger yuan, Krugman said today. "Where would the demand" for goods and services come from, he asked. Boosting savings should be done "in the long run," not now, he also said.

‘Bad Advice’

Krugman is "giving Washington very, very bad advice,"
Roach said in a later interview when asked to respond to Krugman’s reaction to his remarks. "I totally reject his idea that savings is bad."
The U.S. trade deficit is due to a shortfall of savings, and any attempt to address the bilateral gap with China would just cause a shift to another country as Americans kept up their spending, according to Roach. He added that while Krugman and he have been in agreement for years, they are in total disagreement right now.
"What the world needs is a shift in the mix of saving,"
Roach said in a further e-mail. While China has a "major surplus saving imbalance," it’s "highly debatable" whether it’s because of the yuan stance. Efforts to boost Chinese consumer spending will be a more effective way to address the issue, he said.
Roach, 64, has since 2007 served as senior representative of New York-based Morgan Stanley to clients, governments, and regulators across Asia. He was previously the investment bank’s chief economist. Before joining Morgan Stanley in 1982, Roach worked at Morgan Guaranty Trust Company and on the research staff of the Federal Reserve Board in Washington. He has a Ph.D.
in economics from New York University.

Nobel Prize

Krugman, 57, has worked at New Jersey-based Princeton since 2000, previously serving at the Massachusetts Institute of Technology, the International Monetary Fund, and Yale University.
He won the Nobel prize for economics in 2008 for his theories on world trade, and earned his doctorate in 1977 from MIT.
Premier Wen said on March 14 in Beijing that "I don’t think the renminbi is undervalued," using another term for the yuan. "We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency."
The U.S. trade deficit was $37.3 billion in January. It has shrunk from a record $67.8 billion in August 2006 as American consumers slowed spending amidst the recession. Net exports have contributed to gross domestic product the past two years.
Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina this week introduced legislation to make it easier for the U.S. to declare currency misalignments and take corrective action. The Treasury Department is set to decide next month whether to label China as manipulating its currency.

‘Height of Hypocrisy’

"Isn’t it the height of hypocrisy an American can articulate a particular position in its currency but the Chinese are not allowed to do that," Roach said today. "Especially since they as a developing economy with an embryonic financial system need a currency anchor probably a lot more than more ’sophisticated economies’ like the United States."
The U.S. envoy to China this week said that the "recent turbulence" between the world’s largest and third-biggest economies was part of "the natural cycle" and wouldn’t harm long-term ties.
"I am convinced that blue skies are already on the horizon," Ambassador Jon Huntsman said yesterday in a speech at Tsinghua University in Beijing.

By PAUL KRUGMAN
March 19 (New York Times) -- Ahem.
March 19 (Bloomberg) -- Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman's call to push China to allow a stronger yuan is "very bad" advice and that increased Chinese spending is a better way of reducing trade imbalances.
"We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong," Roach said in an Bloomberg Television interview in Beijing when asked about Krugman's call, characterized as akin to taking a baseball bat to China. "We're lashing out at China rather than tending to our own business," which is raising U.S. savings, Roach said.
I really don't understand Roach's argument here; he seems to have subscribed to the Underpants Gnomes theory of trade
balances:
1. Increase savings2. ?????3. Exports!
To be honest, sometimes I feel that I've spent most of my adult life knocking down the same misunderstanding, over and over again. I wrote about more or less the same issue more than 20 years ago:
There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes.
Also, from the Bloomberg article:
"I'm a little curious what Steve thinks would happen if the U.S. increased savings" without a stronger yuan, Krugman said today. "Where would the demand" for goods and services come from, he asked. Boosting savings should be done "in the long run," not now, he also said.
Krugman is "giving Washington very, very bad advice," Roach said in a later interview when asked to respond to Krugman's reaction to his remarks. "I totally reject his idea that savings is bad."
(Btw, this was from a cell phone conversation held while I was, um, sitting on the beach).
What I wonder here is how Roach -- or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene -- but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?
Copyright 2010 The New York Times Company

Commentary by William Pesek
March 22 (Bloomberg) -- Don King, hop on a plane to China for the fight of the year.
The world of economic forecasting just became more exciting, with even a threat of violence. The legendary boxing promoter King can put Nobel laureate Paul Krugman in one corner.
In the other, Stephen Roach, Morgan Stanley’s Asia chairman.
Location: Beijing, the focus of their spat.
Format: Steel cage, of course.
Prize: Bragging rights in world’s most heated debate.
Roach says a "baseball bat" should be taken to Krugman over his call for a stronger yuan. Krugman is miffed that Roach is criticizing his view that "China is adding to the problems of the rest of world."
It hardly matters who wins the "Battle of Beijing." The real story is that this matchup is even necessary. It shows we are still only debating the global imbalances we have been obsessing over for years now -- not addressing them. The blame game continues.
Roach versus Krugman echoes the verbal clash between the U.S. and Chinese governments. As this epic finger-pointing contest unfolds, we are all losers. That goes for the richest investors, the savviest corporate executives and the most unassuming of households from New York to New Delhi.

Roach Versus Krugman

The trouble with Roach’s spat with Krugman is that both men are a bit right, and both are a bit wrong. I am not taking the middle road here or offering an ambiguous on-the-one-hand-on- the-other-hand analysis. The truth really does lie somewhere in between, and that’s just the point.
The Group of Two nations needs to get into a room and negotiate a rebalancing of the world’s most important economies.
Not take cheap shots, not assign blame, but agree to do X, Y and Z over the next 12 to 24 months.
Yes, China needs to let the yuan appreciate (as Krugman argues). It would reduce the pressure on China’s economy and trim a trade gap that may eventually lead to a U.S. credit downgrade. The U.S. drastically needs to increase savings (as Roach says). It must begin exporting something other than debt to return the biggest economy to health.
One nation acting isn’t enough to fix the other’s problems.
Nor is unilateral action a panacea for global markets. These steps must be taken in tandem and telegraphed transparently to both nations’ populations and markets.

Looking in Mirror

The opposite is happening. If only U.S. Senators Charles Schumer of New York and Lindsey Graham of South Carolina, who are introducing legislation to make it easier to punish China, looked in the mirror. Spend less time beating up on China and more telling Americans to stop living beyond their means.
If only U.S. lawmakers were more focused on financial reforms needed to avoid another crisis. If only they would tell Americans that shared responsibility is what’s needed to restore the U.S. brand. Tell Americans that tax cuts aren’t always the answer. Why bother, when China is assuming the scapegoat role that Japan played in the 1980s and early 1990s?
And then there’s Chinese Premier Wen Jiabao. If only he would admit how many of China’s problems are wrapped up in the currency peg. Forget the ill will it generates. Focus, instead, on inflation risks, hot money flows and those $2.4 trillion of currency reserves with which China is stuck.

Hypocrisy Reigns

China’s embryonic financial system won’t grow up until it can do more borrowing in yuan and investors have a real bond market in which to hedge stock holdings. Things won’t cool down until Chinese have something to buy other than overpriced property. China is like an Airbus A380 super-jumbo flying with a broken engine. It’s huge, it can go a long way yet it’s operating unsteadily.
As hypocrisy reigns, think of the global economy as a game of musical chairs. Everyone is tiptoeing around the dwindling number of chairs, hoping to have one when the music stops. That might be fine if we had more growth engines on which to rely.
The U.S. is still sputtering, Europe isn’t much better amid Greece’s crisis, and Asia is still developing, but not without risks. Politicians in Washington and Beijing seem to think that as long as they find a chair when the game is over, all’s well.
Not so in this G-2 world. A Chinese crisis would reverberate everywhere, including the U.S. as it’s beginning to stand again. Another U.S. crisis could be even more devastating for China. Rapid growth aside, it’s a developing economy that will find it harder to generate domestic growth.
It would be fun to be a fly on the wall the next time Roach and Krugman bump into each other. It would be highly entertaining if King, who staged bouts for fighters such as Mohammad Ali and Mike Tyson, could match the two economists.
If we can’t stop debating who is to blame for the sorry state of global affairs, let’s get ready to rumble.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)