Posted on 07/26/2005 5:31:51 AM PDT by OESY
...[S]ome U.S. political leaders claimed a victory in the campaign to blame Chinese "market manipulation" for external imbalances facing the U.S.....
The inherent conflicts in the phrase ("socialist market economic system," and "market supply and demand" with capital controls and a managed float) highlight both the central economic challenges facing China and the need for a comprehensive U.S. economic policy toward China.
On the one hand, China's hesitancy to give up its currency stability is understandable. Currency stability contributed to confidence by foreign investors to build capacity in China and stimulated an export-led surge....
On the other hand, the currency peg likely has led to some capacity growth that may be uneconomic in the longer run... and the peg limits the ability of Chinese monetary policy to cool an overheating economy except through blunt administrative controls....
The revaluation of the yuan will restrain Chinese exports a bit. But this shift will have only a negligible effect on the current account deficit of the U.S....
Sustained economic growth requires a financial system that promotes efficiency in the allocation of capital, rewarding savers and allowing the most promising entrepreneurs to achieve success. Centrally directed credit allocation can promote high rates of saving, investment and growth for a period of time, but directed credit is no substitute for the market....
China's national saving rate is... more than 40% of GDP....
Estimated at about 50% of GDP, the Chinese fixed investment rate is also extraordinary....
In spite of China's accomplishments in raising living standards, its government-dominated banking system allocates credit poorly, and bank dominance combined with gaps in investor protection have impeded the growth of domestic capital markets....
By favoring administrative fiat over well functioning financial markets, China is laying the seeds of lower productivity growth and economic growth....
(Excerpt) Read more at online.wsj.com ...
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