Morgan Stanley Asia chairman Stephen Roach said a “baseball bat” should be taken to economist Paul Krugman over his call for the US to pressure China into allowing the yuan to appreciate.
“We should take out the baseball bat on Paul Krugman — I mean I think that the advice is completely wrong,” Roach said in a 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 US savings, Roach said.
PHOTO: REUTERS
“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 US trade gap. US lawmakers have urged US President Barack Obama’s administration to step up pressure on China for keeping its exchange rate unchanged, a stance criticized as providing an unfair advantage.
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 last Friday. He said the US 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 US increased savings” without a stronger yuan, Krugman said yesterday.
“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.”
The US 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, Roach said. 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.
The US ambassador to China, Jon Huntsman, 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,” Huntsman said on Thursday in a speech at Tsinghua University in Beijing.
Meanwhile, China yesterday said it was sending an envoy to Washington to try to ease trade frictions as its currency regime comes under fire, warning that threats from US legislators could stifle room for progress.
The announcement, along with conciliatory comments by China’s commerce ministry, appeared aimed at cooling an increasingly rancorous dispute that has US senators threatening to slap duties on Chinese products if Beijing does not allow the yuan to rise.
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