Skip to content

Told Al Jazeera Currency Issue Is a “Red Herring”

November 18, 2009

I was interviewed live on Al Jazeera again Monday and apparently caused a bit of a stir.  I repeated the point I made in my blog post, that I think President Obama would be much better served encouraging China on market-oriented reforms than pressuring it to strengthen the Renminbi.  The news story on their website describes my comments as follows:

Patrick Chovanec, an economics professor at Tsinghua University said that the currency issue was a “red herring”.

“I think it’s a big distraction from some of the more substantial issues that he should be talking about,” he told Al Jazeera from Beijing.

Chovanec said the US faced a very similar situation with Japan in the 1980s, with chronic trade surplus and Japan accumulating currency reserves, and that doubling the yen’s value actually increased the trade surplus.

“If Obama wants to achieve real results, he should be pressing the Chinese on market-oriented reforms that open the Chinese market and help unlock savings in China rather than pressing them on the currency itself,” he said.

It’s not really that the strengthening of the yen was responsible for increasing Japan’s trade surplus, which is the way they make it sound.  It’s just that the change in the exchange rate didn’t have the expected effect because structural issues in the Japanese economy made it unresponsive to price signals.  I’m concerned the same would be true for China, unless the focus is put on substantive market reforms.  It’s a question of where to spend political capital to get a meaningful result.

Apparently Stephen Roach of Morgan Stanley has been arguing something similar, which I didn’t realize until a moment ago when I googled “red herring”.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: