Top central bankers play down threat

Top central bankers play down threat of global economic crisis

By DOUG SAUNDERS
http://www.theglobeandmail.com/servlet/story/RTGAM.20050205.wxchina0205/BNStory/Business/

London — Two of the world's most powerful central bankers yesterday tried to reassure the world that they will be able to prevent an economic crisis driven by the United States' spiralling debts and China's unsustainable surpluses.

Alan Greenspan and Zhou Xiaochuan, addressing the finance ministers of the G7 nations on the eve of their summit in London yesterday, seemed to be addressing mirror-image crises: An unsustainable level of personal and public debt and a shrinking dollar in the United States, and a lack of domestic consumer goods consumption and a vast surplus of personal and public savings driven by an artificially weak currency in China.

People's Bank of China governor Zhou Xiaochuan stopped short of the pledge the G7 finance ministers had hoped to hear yesterday — a promise to stop pegging the yuan to the U.S. dollar, a 10-year-old policy that has given China a dramatically high current account surplus, attracted a flood of foreign investment and forced the euro to record highs.

The fixed-exchange yuan has been criticized by all seven G7 ministers, including Canadian Finance Minister Ralph Goodale, since a meeting in Boca Raton, Fla., a year ago during which they pledged to make the world's major currencies — especially China's — more reflective of economic realities.

But Mr. Zhou said China will have to make major changes to an economy that has become too reliant on exports, foreign investment and savings. Many observers saw this as a hint that the yuan will some day be allowed to float.

“We have a very big challenge, with an essential challenge in our economy: We have too much investment in our economy, and relatively weak domestic consumption,” Mr. Zhou said. “Probably it's related to the Chinese tradition, the Confucian tradition ... they save the money for old people; they save too much money. It's the contradiction of the situation in the United States.”

Indeed, the two nations seemed to be facing up to complementary crises. Mr. Zhou noted that China's personal savings rate has risen from 35 per cent of GDP 10 years ago to an astonishing 40 per cent today. “This means we need to reform our social security system to give households more confidence to spend money,” he said.

In contrast, Mr. Greenspan noted that the U.S. personal savings rate has fallen from 9 per cent in 1993 to only 1 per cent today. This, combined with large public sector debts incurred by George W. Bush's low-tax policies and a historically high dollar that has only recently begun to fall, has made the United States highly dependent on imports and has created an enormous current account deficit, currently at 6 per cent of GDP.

Mr. Greenspan said economic and political factors will help prevent the U.S. current account and trade deficits from rising further.

“The voice of fiscal restraint, barely audible a year ago, has at least partly regained volume,” he said. “If actions are taken to reduce federal government dissaving, pressures to borrow from abroad will presumably diminish.”

“The U.S. current account deficit cannot widen forever,” he said, but “fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity.”

His words immediately caused the U.S. dollar to rise. It closed yesterday at just under $1.25 (Canadian), up 0.72 cents.
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