The Capital Interview: Paulson Says China’s Currency ‘Doesn’t Reflect Reality’- Lee Hudson Teslik

From CFR’ website:

… In an interview with CFR.org, U.S. Treasury Secretary Henry M. Paulson says U.S. policymakers will push China for more flexibility in taking steps in the short term that will allow its currency to appreciate, with an eye toward the currency having a market-determined valuation in the “intermediate term.” Paulson says there is a greater need for currency adjustment now than in 2005, when China took steps to reform its currency and loosen its peg to the U.S. dollar.

I wanted to start with China, which obviously is an area of particular expertise for you. During the Asian financial crises in the late 1990s, Congress and President Clinton heaped praise on China for not devaluing its currency. Now, of course, China is criticized with equal intensity for doing precisely the same thing”for not changing the value of its currency. Is this criticism fair?

China needs a currency that reflects underlying economic fundamentals. This is going to be the key to the future development of the Chinese economy, toward more balanced economic growth, and it’s going to be the key to further reform. It’s important for all of China’s trading partners and for China. Their currency does not reflect fundamental economic reality and it’s very difficult to have a country that’s such a key part of the global financial system have a currency that doesn’t reflect reality. [Full Text]

Read also U.S. Treasury’s Report to Congress on International Economic and Exchange Rate Policies, June 2007: China:

The Chinese economy continued to grow rapidly during 2006, with GDP growth of 10.7 percent for the year. Growth accelerated during the first quarter of 2007, reaching a higher than anticipated 11.1 percent. At the same time, internal imbalances within the Chinese economy, which are of concern to the Chinese authorities and are the focus of the most recent Five-Year
Plan, continued to grow more severe.

Growth continues to rely on net exports and investment. In 2005, net exports and investment contributed 26 percent and 38 percent of GDP growth, respectively. Net exports have been rising as a share of GDP in recent years, reaching a record 7.3 percent of GDP in 2006. A preliminary estimate indicates that net exports contributed about one fifth of GDP growth in 2006. The expansion of Chinese net exports continued in the first quarter of 2007. The trade surplus for the quarter was $46.5 billion, double the surplus in 1Q2006. [Full Text]

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