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Camp Statement: Hearing on China’s Exchange Rate Policy

March 24, 2010

In the1970s, China injected itself with economic reform.  Now, in 2010, Chinaappears afflicted by a menacing strain of that reform that is eitherconstraining a global economic recovery or, worse, capable of creating a neweconomic pandemic.  While China’s emergence as an economic powerhouse hasrightly grabbed our attention, however, the trends are not new, and there aresome predictable similarities between China’s economy now and Japan’s in the1980s.  It is critical that China address the serious flaws in itseconomic structure, but we should remember we’ve seen this before, althoughperhaps not on this scale. 

This hearing is about China’s currency policy and global imbalances.  Likethe IMF has, I can stipulate that China’s currency is undervalued, plain andsimple.  I can also agree with G20 leaders that the world has steepimbalances that must be corrected.  But let’s not lose sight of the factthat there are fundamental problems with China’s economy, and let’s not pretendthat China’s intervention in the currency markets, by itself, is the root causeof our ten percent unemployment or of China’s ten percent annual GDP growth.

We’ll hear today from some pretty bright economists on the problems withChina’s economy.  I’m looking forward to hearing what they have tosay.  My going-in view is that China’s deliberate and dangerous wealthtransfer from everyday households to inefficient export-platform factories isstanding in the way of the domestic consumption that the Chinese (and the restof the world) believe the Chinese (and the rest of the world) so desperatelyneed.  China must introduce global best practices into its banking sector,mature its financial markets, better protect intellectual property rights, andopen more comprehensively to foreign direct investment.  China also shouldopen its markets much more fully to all goods and services, particularly thosecoming from the United States. 

An increase in the value of the RMB will facilitate some of thesemeasures.  For others, the much-sought currency appreciation will be ahappy—though perhaps unintended—offshoot of the broader reform.  All ofthese measures will help China move toward liberalizing its capital account,which should be the ultimate goal for all of us, because none of us can knowthe true extent of RMB undervaluation until the currency floats.

In my view, however, when it comes to China, focusing on the currency valuationissue to the exclusion of the others is more likely to lead to collectivefrustration than to any improvement in the health of the critical U.S.-Chinese economicrelationship.  But, that said, while we shouldn’t obsess over the value ofthe RMB, it would be an enormous mistake to give up on addressing it. 

To that end, I believe the Obama Administration should continue to addressChina’s currency policy in high-level bilateral summits, like the Strategic andEconomic Dialogue.  I think the Administration should restart languishingBilateral Investment Treaty negotiations with China and prompt it to makeprogress on the currency and broader issues as part of the BIT process.  Ialso believe the Administration should devote time and resources towardattempting to establish a robust, multilateral process—either in the G20, IMF,or elsewhere—so that other countries, particularly some of China’s neighbors inAsia, can bring new points of pressure to bear.  I would hope that Chinawould commit to this multilateral process and participate in good faith.If China wants to be treated as a major international player, it has to own upto the responsibilities of that status.

By a similar token, if the United States wants to maintain its status as theinternational leader, then we better make sure that whatever we do to addressChina’s currency regime, we do it without losing sight of our internationalcommitments and the overarching value of the multilateral trading system.I am wary of panicked approaches whose supporters concede are inconsistent withour obligations, but then try to justify those inconsistencies by casuallyasserting that the normally applicable rules just shouldn’t apply.  

So far, I’ve focused on China.  Let me close by saying I fully admit theUnited States needs to get its fiscal house in order.  China wouldn’t beaccumulating hordes of currency reserves and U.S. Treasuries if the UnitedStates stopped racking up debt at the current unsustainable pace. 

Thank you, Mr. Chairman, I yield back.