May 16,2009

Krugman in China: Stimulating, Controversial, and Expensive

By CSC staff, Shanghai

From Beijing to Shanghai, then on to Guangzhou, a week's whirlwind trip across China by Paul Krugman, the 2008 Nobel laureate in economics, carried great expectations. It was hoped that the master would predict the future of the global economy, as well as offer inspiration for the Chinese from a strategically lofty position after feeling the pulse of China's economy.

To the disappointment of his Chinese fans, the only prediction Krugman made was that the RMB won't approach internationalization until "after his death--40 or 50 years later." Many Chinese have thought, wishfully, perhaps, that the financial crisis would be a good opportunity for RMB to achieve the great leap forward, as well as for the retirement of the USD from its privileged position as the international reserve currency.

Krugman's two books, The Conscience of a Liberal and The Return of Depression Economics and the Crisis of 2008, are extremely popular in China. The man, who has been said to have predicted the 1997 Asian financial crisis and the 2008 global financial tsunami, is regarded as a great prophet in China.

As is common when economists are allowed to pontificate, Krugman's speech did not provide plentiful suggestions for the development of China's economy, but did point out many of what he saw as its shortcomings. The New York Times columnist, who has fiercely criticized the Bush and Obama administrations and Wall Street, again disappointed his fans by not flaying the US for triggering the financial crisis. On the contrary, he used his bully pulpit to lay not a little of the blame on China's huge trade surpluses, which, as he certainly intended, led to a heated debate with Chinese scholars present at the meeting.

Before the London G20 summit, China's Central Bank Governor Zhou Xiaochuan had put forward a proposal that a new international reserve currency, separated from any sovereign state, should be set up, and that perhaps the role of the IMF's SDR (Special Drawing Rights) should be given full play in particular. Krugman, in an article, titled China's Dollar Dilemma, wrote to refute that view. Before his first visit to China, these remarks infuriated many Chinese scholars.

In a presentation at Shanghai Jiaotong University, Krugman said: "If the unemployment rate remains high in the US and the euro zone while China maintains a high trade surplus two years later, China will be regarded as a trouble maker."

Krugman also hinted that China's massive trade surplus is the result of manipulating its currency's exchange rate. He said: "The U.S. Congress will review China's currency each year, and the Treasury will report whether some countries are manipulating currency or not. The answer each time is that China doesn't manipulate, but everybody knows this is not an honest assessment, it's a decision made to avoid conflicts."

Xia Bin, director of the Institute of Finance of the State Council Development Research Center, argued that China's is a long-term approach of expanding domestic demand and stimulating consumption for China.

Xia Bin added, "Why do US mainstream economists always lead us to discuss the issue of Sino-US trade? Why don't they guide the intellectual to the study of how to restructure the current international monetary system?"

In a speech in Beijing, Krugman said: "That RMB is not freely convertible and maintaining its status as a weak currency is the result of China's monetary policy." He was referring to China's huge holdings of USD as a means of maintaining an undervalued, non-convertible currency, pegged to the dollar.
 
Long Yongtu, the Secretary-General of Boao Forum for Asia, argued: "Among all countries in the world, some maintain their own non-convertible currency and some decide not to open their capital markets. If Mr. Krugman believes that those who choose to practice non-convertibility are manipulating the exchange rate, China and many other countries are doomed to manipulate exchange rates forever."

Many in the Chinese media criticized Krugman's defense for the US dollar: "The U.S. dollar is your currency, but it's our problem."

Krugman said: "No one has required you to establish your foreign exchange reserves based on US dollars. There is also the euro, Japanese yen, why doesn’t China choose one of them? It is China's foreign exchange reserve officials who should answer this question. This has been a decision of the Chinese, not Americans." He pointed out to Chinese scholars and the audience, many of whom think the US government should guarantee China’s foreign reserve assets, that it is not the responsibility of the US to safeguard the security of foreign countries?foreign exchange reserves.

Xia Bin asked: "The US government is issuing bonds to use in its stimulus package, which may lead to inflation down the road. Since the U.S. boasts 8000 tons of gold among the total global reserves of 24,000 tons, why doesn’t it sell gold for dollars at the critical moment? Why keep issuing bonds?"

Krugman said: "Since we do not need the money, why do we have to sell gold?"

Krugman believes that the decline in global trade will have a great impact on developing countries. He is well-known for his study on intra-industry trade pattern. He thinks trade among developed countries often happens in the same industries. For example, France and Germany both import and export cars to each other and the wage levels of workers in the two countries are similar. This trade will not bring significant issues such as business failures and unemployment. But trade between China and developed countries is not the same. China holds a comparative advantage in international trade due to its cheap labor, which leads to the closure of many companies in the same industries in other countries, especially under the economic crisis, and also brings about specialization, reconstruction and political pressure.

Krugman's first trip to China, which has drawn great crowds and interest, has not been without its detractors. China Business News has criticized its surrounding layers of sponsors.

China's Minsheng Bank has sponsored this trip. Krugman's fee for each appearance is $200,000. In Guangzhou, China Mobile sponsored his lecture at Sun Yat-sen (Zhongshan) University. At the welcoming cocktail party in Beijing, Ning Gaoning, COFCO president, invited Krugman as a top celebrity into COFCO's celebrity association. BMW 7 Series was the VIP reception car during Professor Krugman's Chinese trip.

Had you wanted to hear Krugman speak at first hand, you would have paid 5,800 yuan/place for guest seats, 9800 yuan/place for VIP seats, and 18,000 yuan/place for supreme seats. VIP guests sitting in the front row also received one of Krugman's books, autographed by the author. Those occupying distinguished seats in the front row who were also to attend a banquet held for Krugman were privileged to pay 58,000 yuan

Compared with the title "2008 Nobel Laureate in Economics," Krugman will find that "prophet" may bring him more popularity in China, which is ironic, as Krugman modestly told reporters that he hadn't predicted the Asian crisis, nor seen the financial turmoil after the subprime crisis.

Exhausted by the tight schedule of the Chinese trip, Krugman admitted that he is not a cognoscente of China. For example, when asked to comment on issues such as China's plan to stimulate the economy causing production surpluses, he answered "I know nothing about it."

On when the RMB will become an international currency, Krugman estimated it might happen after his retirement or death.

"You see, the euro has its problems. It is estimated that euro will go international in maybe 10 years. RMB may have to wait 40 to 50 years" Krugman added that, "As for 40 to 50 years, I mean a long period of time."

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