The quest for better balance in uneven world growth rates and a correction of yawning international trade gaps may take years, if China's cautious move to revalue its currency is any indication. But economists reckon we may all be better off for this calibrated approach if sustaining brisk global economic expansion is the ultimate goal.
As with the Federal Reserve's year-long "measured pace" of US interest rate rises, China's move to shift the yuan gently from a dollar peg to a multi-currency target appeared careful to avoid financial market disruption or short but sharp trade shock.
A tiny 2.1 percent upward revaluation of the yuan will hardly stop super-competitive Chinese exports flooding Western markets. And there is little chance it will raise the price of those goods to a point where US consumers stop buying in favour of homespun products. Yet, by creating the possibility at least of a slow, upward creep of the yuan in tandem with gradual policy changes around the world, it may be seen by history as more significant.
"This move is small, but it could turn out to be the thin edge of the wedge that ends - over a period of years - in a substantial correction in global imbalances," economists at BNP Paribas said in a note to clients this week. "If so it will be the biggest thing to have happened for years."
Experts suspect there has been an implicit agreement among monetary authorities that economies and global markets are delicately poised. One false move and everyone in the increasingly integrated global economy suffers. If the result is patience and caution, then there is a growing chance that these global imbalances may ease without the dramatic crises many have feared for years.
"By finally putting a flexible currency regime in place, the Chinese leadership has removed an important impediment to global rebalancing," Stephen Roach, chief global economist at Morgan Stanley, told clients this week. "That raises the probability of a benign rebalancing endgame." The Group of Seven leading economic powers, which in April began calling for "vigorous action to address global imbalances," also held out that hope.
In a statement last Thursday, it said China's move would contribute to continued global growth and stability - likely language for upcoming communiques from the G7, which consists of the United States, Japan, Germany, Britain, France, Italy and Canada. G7 finance chiefs began referring to "imbalances" at their Dubai meeting in September 2003.
In broad terms, they describe big gaps in national growth rates and trade accounts that followed the US recovery from the dot.com crash of 2001 just as developing nations, such as China and India, emerged as major global economic players.
In effect, "global imbalances" is policy-speak for a massive and rising US overdraft with the rest of the world. As with most large debts, the deeper into the red the world's largest economy has gone, the more the overdraft has become a problem for debtor and creditors alike.
The United States has been living so far beyond its means, it now owes more than a fifth of a year's national income to foreign governments and investors and annually consumes more than it earns, to the tune of 6 percent of gross domestic product.
Much of the new credit extended to the United States in recent years has come from emerging Asian nations which, to hold their currencies steady and underpin exports to the United States, have banked billions gained in intervention proceeds back in US bonds and assets. Helping spread the role of what some economists dub the "consumer of last resort" away from the United States, slow and painful reforms of aging European and Japanese economies are underway. But this will take many years to bear fruit. In the meantime, the policy focus is on the United States and emerging Asian economies.
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