MARTIN CLUB - CHARLES WYPLOSZ

Charles Wyplosz: Martin makes two important points: China's current surplus is driven by very high savings and the US cannot give orders (and, he does not say so, slap import duties as it will). He does not go the next steps, so I will oblige and do it.

If savings is the problem, and it is, what good would a renminbi appreciation do? There are some theories that exchange rate appreciation can reduce saving, but the magnitude of the effect is, at best, minute. The inescapable conclusion is that we should stop pestering the Chinese with calls for appreciation and threats of designating them as currency manipulators, as many in Washington plot to do. There is no doubt that the renminbi is not a free floating currency, but there is no international obligation to let all currencies float. Maybe the renminbi is somewhat undervalued, but that cannot be the ground for aggressive diplomacy. If it is undervalued and China sticks to its exchange rate policy, all that will happen is real revaluation through inflation. Not a great idea, I agree, but that is China's problem. Let them make that choice as an independent nation.

Much of this huge saving is invested locally, which largely explains one of the most spectacular growth performances mankind ever witnessed, with the added bonus that it benefits about one-fifth of humanity that was extremely poor when it all started. Not all of it can be invested. As Martin notes, a very low interest rate may already encourages excessive investment. So calling for Chinese firms to invest their savings is a bit disingenuous. Sure, the government could spend more, especially on infrastructure, health and social programmes. It is good to pass this sound advice to the Chinese authorities, but then it is for them to decide.

In the meantime, what can they do with this mass of savings that cannot be absorbed domestically? Invest abroad. Not in US Treasuries, but in profitable corporations. This is what they just set out to do with the creation of the State Investment Company. The first big move has been to buy a small stake, with no voting right, in the Blackstone Group. Why so timid a move? Because the Chinese know that they are not welcome in the US, they remember the groundswell of xenophobia when they wanted to buy Unocal, immediately branded a key strategic unit. Would Martin agree that we ought to welcome into the world economy the Chinese savers as well as the Chinese workers?

It is time to acknowledge that there are no rights and wrongs, but mistakes and counter-mistakes and, more importantly, huge common interests beyond healthy competition. This means sitting down and talking. Martin is absolutely right to call for dismissing the G8 as a misguided transformation of the out-of-breath G7 and setting up a G4. This is what Peter Kenen, Jeffrey Shafer Nigel Wicks and I proposed three years ago, only to fall on deaf ears. Thanks, Martin!

(Charles Wyplosz is Professor of International Economics at the Graduate Institute of International Studies in Geneva where he is Director of the International Centre for Money and Banking Studies.)