Anne Krueger and Desmond Lachman

Since Deng Xiaoping initiated a program of economic reform twenty-five years ago, China has enjoyed annual economic growth averaging approximately 8 percent, and its influence in the global economy has become profound. At a January 10 AEI event, leading economists considered how to extend China's remarkable growth and how its exchange rate affects the global economy, particularly the U.S. current account deficit.

Anne Krueger, first deputy managing director at the International Monetary Fund, noted that real Chinese gross domestic product (GDP) grew by 9.7 percent annually between 1990 and 2003. The Chinese success story has lifted tens of millions of Chinese out of poverty yet, as Krueger cautioned, China is still markedly poorer than its neighbors and has a relatively low per-capita income even after a doubling in the last decade or so.

China grew from being responsible for 1 percent of international trade in 1979 to 6 percent of international trade today, according to AEI's Desmond Lachman. As the sixth largest economy in the world, China has become a dominant economic force, particularly in the Asian region.

The panelists considered economic reforms that are vital to continued Chinese success. Few economists believe that China's current pace of growth is sustainable, and both Krueger and Randal Quarles, assistant secretary for international affairs at the U.S. Treasury, emphasized the need for structural reforms in China's banking system to decrease non- performing loans and overinvestment as part of a longer-term strategy. Quarles argued that China should allow greater consumption rather than continuing to save at such a high rate--roughly 40 percent of its GDP. He encouraged China to improve its governance of financial institutions and its accounting and regulatory system, and also to address problems in its judicial system such as bankruptcy laws and the enforcement of contracts. AEI's John H. Makin stressed that China must also dismantle its control over capital outflows and alleviate pressure related to the imbalance between its traded and nontraded goods.

The speakers agreed that China could assist the global economy by moving to a flexible exchange rate that would more accurately reflect the value of its currency. Harvard University's Jeffrey Frankel blamed the high U.S. current account deficit on low national saving and a high budget deficit but noted that while the U.S. dollar has already depreciated, China could easily allow appreciation of its currency, which he claimed to be undervalued "in real terms by 35 percent."
 
Morris Goldstein of the Institute for International Economics described the currency appreciation as "the classical remedy for a country experiencing both an external surplus and an overheating of the domestic economy," adding that it would make exchange rate policy an ally of needed banking reform, low inflation, and continued market access for China's exports.

Li Shantong of the China Development Research Center considered challenges to China's continued growth, including the constraint of available natural resources, environmental concerns, the aging population, the ongoing pressure of a 10-million-strong new labor force every year, and income distribution. She concluded that "it is still possible for China to maintain its relatively high growth rate in the next fifteen years, but there are a lot of challenges we are facing in future development."