CBC on China - US currency debate (transcript)

MediaCBC on China - US currency debate

Transcribed by April Scott

Female Host:Wu Xiaoling is to China, as E.F. Hutton is to America. When he speaks, everyone listens. Mr. Wu, is the Vice-Governor of the People's Bank of China. On Friday, he mused about the risks of the U.S. dollars' decline against Asian currencies. Currency traders the world over, took that as a signal that his country might dump some of it's 800 billion American greenbacks. Well, that in turn, sent the Yankee dollar on a deep slide. It has since stabilized. But, the statements still have people worried. Peter Morici is the former chief economist at the U.S. International Trade Commission. He's now a business professor at the University of Maryland. And, we reached him in Alexandria, Virginia. (recorded segment) Professor Morici, why would Mr. Wu muse like this? I mean, it's a rather dangerous thing - to sort of wonder out loud. Isn't it?

Peter Morici: Well, it certainly is irresponsible. What's going on is, the Americans are trying to put some pressure on China, to revise it's irresponsible currency policy. And, so, this is a way of rattling the American cage. By threatening to cause a financial crisis.

Female Host: And, it worked.

Peter Morici: Well, it works, only to a certain degree. We have a lot of tolerance for Chinese nonsense. But, they shouldn't overestimate our patience. If China causes a financial crisis; it could cause a recession in the United States. But, it would likely cause rioting in the streets of Shanghai. Because, the Chinese economy is so dependent on exports to the United States, to maintain employment. You know, the Chinese leaders, are a bit like a child whose found explosives in the basement of a mansion. And, it's decided to play with matches

Female Host: So, they're - you're saying - that basically China and the United States have a kind of monetary, mutually shared destruction?

Peter Morici: I think that China has more of it's own destruction assured. The United States could withstand the dumping of the dollars by China. It would be very discomforting. It would require alot of adjustments on our part to accommodate. However, the net effect on China could be devastating. China has become too arrogant about it's ability to export cheap electronics. And, toys, and so forth to the United States. Based on an undervalued and manipulated currency. And, very large export subsidies.

Female Host: So, tell me how it would hurt the Chinese economy then?

Peter Morici: Well, in a nutshell; if it caused a recession the United States, U.S. imports from China would drop off dramatically. What's more - if China took such a hostile act, then I think the tariffs which everyone is so worried about; would ultimately happen. If China can't export it's electronics, and toys, and it's T-shirts to the United States; a lot of the workers that have rushed to the cities to work on export platforms to make products for the United States, won't have jobs. They're not in state owned enterprises. Where they're employment will be assured. But, rather, they'll be turned out into the streets, rather rapidly. A large mass of unemployed peasants on the streets of Shanghai, would not be particularly good for the stability of China. And, the survival of the Communist Party, as a continuing autocratic, ruling entity in China.

Female Host: But, do you think the effect on the United States would only be temporary?

Peter Morici: Yeah, I do. I think the Americans can learn to make T-shirts again. The Chinese have not mastered automobiles.

Female Host: Why has the Chinese trade deficit problem has gotten as large as it is?

Peter Morici: Because, the Bush Administration inattention. I mean - the Bush Administration has been happy to borrow it's way to prosperity. President Bush has presided over this massive run-up of debt to China. And, the massive accumulation of U.S. dollars, in the hands of the Chinese. Which, by the way - they haven't even left the United States. They're putting them in Treasury Securities. And, they're held in a depository account. In a security account at the Federal Reserve. They're right down the street from here. But, what's happened is - that we've have borrowed a lot, to live well. The Chinese have recycled the dollars, into U.S. Treasury Securities. In turn, that's kept mortgage rates low. Which has run up housing prices. Which has prevented people to borrow against their houses and import more goods. It's kind of a house of cards. Or, a Ponzi scheme - to be more accurate. We've had three Treasury Secretaries oversee one of the most irresponsible economic policies in modern American history.

Female Host: And, so, you're saying - though that isn't fragile and frail. And, able to be damaged severely by the Chinese dumping this currency?

Peter Morici: What I'm saying is; the damage to China, would be far greater than the United States. The Americans have monetary levers at their disposal. For one thing, you asked - how will you finance your massive Federal deficit? Our Federal deficit is not massive. It's about $250 billion dollars, this past year. That is easily financiable in our financial markets. I think that there would be an international reaction to this action by China. If it were to cause a great, global financial disruption. That it would not like. You know - at the end of the day; we're all part of an international community. That's what globalization has done. And, it requires responsible conduct by the principal players. China has become arrogant. And, believes because of the injustices of history, it doesn't have to behave responsibly. And, it should cause the international community to stand up and take attention. The Europeans. The Canadians. The Japanese. The Americans. And, say - are the Chinese really capable of being a responsible partner in the WTO? Are they capable of being a responsible partner in the IMF and the World Bank? Are they really capable of participating in global governance? As a responsible and reliable partner? The answer so far is no.

Female Host: But, China is also saying that it doesn't - it has too many of it's eggs in one basket. One currency basket. That it wants to diversify. That it wants Euros. That it wants Yen. It's got too many dollars. So, isn't that a good fiscal decision on their part; to try to diversify that currency?

Peter Morici: Well, they chose to accumulate this mass pile of dollars, by having an undervalued currency. And, if they do that - if they diversify, into Euros, Canadian dollars, and Yen; what that will do, is drive up the values of those currencies. And, cause massive trade surplus' with those places. Unless, they impose tariffs. Which no one seems to approve of. One way or another; China cannot be led by an exports, which are subsidized to the tune of 10% GDP. If it's going to participate in the global trading system. We all can't be buying Chinese products, if they don't buy in return.

Female Host: Mr. Morrisey, thank you very much, for speaking with us.

Peter Morici: You're quite welcome. It's been my pleasure.

Female Host: Bye-bye. (end of pre-recorded interview) Peter Morici, is the former Chief Economist at the U.S. International Trade Commission. He's now a business professor at the University of Maryland.

MediaCBC on China - US currency debate