Senior Chinese and Indian financial officials dug in their heels yesterday over the speed at which they will allow their currencies to appreciate in the face of heavy pressure from trading partners.
Both People’s Bank of China governor Zhou Xiaochuan and Indian Finance Ministry chief economic advisor Ashok Lahiri insisted that their currency regimes must be liberalized at a pace that matches domestic financial reforms.
While launching an attack upon US policymakers’ “crude attempts to manipulate away” the US current account deficit through exchange rate adjustments, former US Treasury secretary Larry Summers insisted that the real exchange rate of the yuan and rupee must “appreciate significantly” over time. It would be damaging to India and China to resist that process for too long, he suggested at a seminar. Responding to concerns that a rigid exchange rate regime heightens vulnerability, Zhou defended China’s stance of moving cautiously. Beijing previously had a plan to achieve full current and capital account convertibility of the yuan within ten years but that was upset by the Asian financial crisis of 1997, he noted. A new plan was adopted in 2002, but this time “we decided to achieve convertibility gradually,” he said.
Zhou attacked outside experts who advised China in the past that it needed to develop a strong export sector and to accumulate foreign exchange reserves before moving to full current account convertibility and who are now attacking it for not achieving convertibility more quickly. Liberalization must mesh with domestic economic and financial system reform, Zhou insisted.
India currently has a “fierce debate” over the speed at which to liberalize the rupee, said Lahiri, but pointed out that the issue for India is “whether to achieve full capital account convertibility or fuller convertibility.” He agreed with Zhou that it is a “chicken and egg” situation over whether domestic reforms should be completed before opening up to external capital flows or whether capital flows should force the pace of reform. “Do you close the hatches before the submarine dives, or rush to close them [after the water comes in]?” he asked.