In this article about our Prime Minister’s recent trip to China, the journalist warns us as follows
The Prime Minister said China needed to understand what was at stake and he urged its leaders to open its markets.
In a speech in Beijing Mr Cameron explained that for the world economy to be able to grow strongly again – in particular the struggling Western economies – China had to start spending more and open its markets.
In a reference to the low valuation of the yuan, which has helped China’s exports and allowed it to build up massive reserves of foreign currency, he said: “The truth is that some countries with current account surpluses have been saving too much while others like mine with deficits have been saving too little.”
Then “And the result has been a dangerous tidal wave of money going from one side of the globe to the other. We need a more balanced pattern of global demand and supply, a more balanced pattern of global saving and investment.”
Addressing students at Peking University, Mr Cameron admitted that China was already moving towards increased domestic consumption and looking at introducing greater “market flexibility into its exchange rate.”
But he added: “This cannot be completed overnight, but it must happen. Let’s be clear about the risks if it does not, about what is at stake for China and for the UK – countries that depend on an open global economy.”
Mr Cameron describes the effects of a loose money policy in his nation and other nations of the Western World. No mention is made that our central banks have produced the money in the first place that has created this money “tidal wave.” So he is describing a situation and policy prescription for a horse that has already bolted.
Perhaps the best policy would be to stop doing this loose money policy!?
There is a core intellectual error associated with this line of thinking, which I wrote about here. I would encourage a re-read of it for anyone who holds the same views as our PM on these matters. I hope he is better advised before he makes such statements in the future.
I find it difficult to agree with Cameron’s Krugmanesque complaints about global imbalances. Part of the point of the theory of trade from classical economics is that there can’t really be such imbalances.
But, China should still reform itself. Remember, the Chinese currency peg is created by banning ordinary Chinese people from buying other currencies except in very limited amounts for holidays. The high value is not a result of prudent monetary policy in China.