Experts meeting in Washington Thursday at a Cato Institute monetary conference have agreed China has made long strides in improving its financial system, but its currency should be further revalued.
Jonathan Anderson of UBS Bank in Hong Kong gives China high marks for improving its banking system. Mr. Anderson, who is the chief economist for Asia at UBS, says as the banks strengthen the government is moving to sell them off to private owners, both Chinese and foreign. This, says Mr. Anderson, is a sensible policy.
"Privatization is the fundamental and only answer for Chinese banks," he noted. "The authorities may be doing a better job of managing the financial system today but the fundamental problems will not be resolved until the state gets out of the business of running banks. Privatization is the long-term solution."
Mr. Anderson says that foreign banks in just the past 18 months have invested 20 billion dollars for minority holdings in Chinese banks.
But for Morris Goldstein, the former International Monetary Fund economist who is now a researcher at the Institute for International Economics, currency revaluation remains the key financial issue. He regards the modest revaluation of late July as inadequate.
"The revaluation of the RMB [China's currency] that has occurred since July 22 is clearly way too small to make a meaningful contribution towards reducing either China's huge external imbalance or large global payments imbalances generally," he explained. "If the undervaluation of the RMB is on the order of 20 to 30 percent, two percent doesn't get you very far."
Mr. Goldstein says a significant revaluation would have positive domestic benefits and would restrain protectionist impulses in the United States, China's most important export market.
"If a 'train wreck' is to be avoided, China needs to make a meaningful down payment of 10 to 15 percent appreciation of the RMB from its current level over the next three to six months," he added.
But the experts at the monetary conference said there is little chance that China will make such a significant currency revaluation any time soon.
