China Redux

The AP reports that the G-7 is placing renewed pressure on China to make the yuan more flexible. No suprise there.

But a closer look at statements from the central bankers and foreign ministers of the world’s wealthiest countries suggests something deeper: the G-7 countries are hoping that China’s growth will slow from its current pace of 10% per year.

Of course, no one wants to come out and say this. Instead, they talk about letting the yuan appreciate and opening up to more foreign direct investment and all that good stuff. But there is no question that China’s unprecedented growth imposes serious strains on the G-7. For one, it’s creating tremendous trade deficits (and not just for the US). The account deficits are even larger; China has accumulated massive amounts of foreign reserves–over $1 trillion worth.

The reality is that what’s best for the G-7 may not be best for China. At this weekend’s meetings, the G-7 neglected to criticize Japan for the performance of the yen, but did choose to call out China by name. Rodrigo de Rato, Managing Director of the International Monetary Fund (IMF), implicitly compared Japan and China: ”Japan is moving out of long and difficult deflationary circumstances. The best thing Japan can do for the global economy is to keep growing,” he said.
And the best thing China can do for the global economy, de Rato seemed to be saying, is to slow down. Will it happen with a bang or with a whimper?