HIGH PRAISE: Joseph Stiglitz speaks optimistically about China at the annual meeting of the China Development Forum in Beijing this March
　　
　　Not long after China’s top legislative body, the National People’s Congress, passed the 11th Five-Year Plan for National Economic and Social Development (2006-10) during its annual meeting in mid-March, Joseph Stiglitz, the 2001 Nobel Prize laureate in economics, talked to 21st Century Business Herald, a leading business paper based in south China’s Guangdong Province, on the economy and the newly adopted plan. Here are some excerpts from that interview:
　　21st Century Business Herald: In recent years, with China’s rapid economic development, the “Made in China” tag has become increasingly visible in the world. This has, on one hand, enhanced the country’s profile, but on the other, it has also led to controversies and allegations of dumping. How do you view relations between China and the world, and especially between China and the United States?
　　Joseph Stiglitz: This so-called dumping cannot be viewed as real dumping, which refers to sales below cost. In the United States, dumping has been used as an excuse to prevent certain products from entering the U.S. market. This is detrimental. What China can do is to negotiate, through the WTO (World Trade Organization), to clarify the issue.
　　China should show the vitality of its economy. Economic achievements of China have not come from the foreign exchange (forex) rate or unfair trade policies. China has created a vigorous economy.
　　It is a big misunderstanding to believe that China’s economic achievements have resulted from the undervaluation of its currency. This view holds that once the renminbi is revalued, the current trade mode will change. But actually Chinese commodities such as textiles are highly competitive. Even if the currency were revalued by 5, 10 or 15 percent, the impact would be very slight. And even if China stopped exporting textiles, Bangladesh would continue to export them. The competitive pressures that U.S. textile producers face will thus not ease and the U.S. trade situation will remain unchanged.
　　International trade is not simple bilateral trade. How can we say that the U.S. trade deficit results from China’s trade surplus? China imports petroleum from the Middle East while the Middle East purchases goods from the United States, and China also buys airplanes from U.S.-based Boeing. This is a complex multilateral state of affairs. So this is a misunderstanding, but from China’s stance, it is hard to explain.
　　The key to this issue is the United States’ own economic policies. The fiscal deficit indicates that the government is borrowing money and the negative public savings rate shows that the public also needs to borrow money. The problem lies within the United States and the blame should not be put on China. Twenty-five years ago, the blame was on Japan. The situation was rather similar: President [Ronald] Reagan cut taxes, leading to huge fiscal and trade deficits. The difference is, now the target is China.
　　China’s exports have been growing quickly in recent years, with a year-on-year growth rate of 28.4 percent in 2005 and an expected growth rate of 25 percent in 2006. But according to the Global Competitiveness Report 2005-06 by the World Economic Forum, China’s competitiveness has been declining for several consecutive years. This gives us a strange feeling that on one hand, China is highly competitive with its low-priced “Made-in-China” goods, while on the other, its competitiveness is declining. What are your comments on this?
　　China’s competitiveness is not based on its cheap labor. The cost of labor in the textile industry is lower in Bangladesh and some other countries. The advantages of Chinese textiles lie in highly efficient equipment, skillful workers and quality products. So I do not agree with the opinion that low costs and unskilled workers bring competitive advantages to China’s textile industry. More importantly, China’s GDP (gross domestic product) will continue to increase. This is why the 11th Five-Year Plan advocates innovation--combining rising GDP with innovation and producing high value-added products.
　　China’s manufacturing exports rely mainly on foreign direct investment instead of indigenous enterprises. What do you think are the advantages and limitations of China’s current outward-looking economy?
　　
　　
　　ENCOURAGED TO SPEND: The Chinese Government is actively encouraging its citizens to spend more in the coming five years to add to the country’s growth momentum
　　
　　Foreign investment is very important, but this importance does not lie in how much capital has been invested. China already has $800 billion in forex reserves. So it is not a problem of capital, but it is vital to learn advanced technologies. China should try to absorb these technologies and information and then seek more independent innovation and produce private-brand products. Lenovo is a good example. Now it has become an independent company, making computers under its own brand name. It is true that an outward-looking strategy has its limitations; that is why stimulating domestic demand is given so much importance in the 11th Five-Year Plan.
　　China’s forex reserves exceed $800 billion, most of which is U.S. dollar assets. If the U.S. dollar weakens, China will inevitably suffer huge losses; but if China dumps U.S. dollar assets in the market in large quantities, it will probably cause economic decline in the United States and damage China’s exports that rely largely on the U.S. market. China seems in a dilemma regarding its forex reserves. Do you have any suggestions?
　　This is indeed a dilemma. The best way out is to sell U.S. dollar assets, like some small Asian countries have done. These countries can sell U.S. dollars freely without the fear of influencing the value of the U.S. dollar globally. But China and Japan face a problem. They can only slowly try to sell some of the U.S. dollar assets so as to not upset the global forex market.
　　It is not necessary for China to continue to hold U.S. treasury bonds whose interest rate is low. You may consider other types of U.S. dollar assets. It is important that you control the scale of forex reserves. You can change a part of it into investment, that is, turning a direct holding into an indirect one.
　　In the newly passed 11th Five-Year Plan, the Chinese Government has set a target of a 7.5 percent annual growth rate of GDP for the next five years and a doubling of per-capita GDP in 2010 over 2000. Your comments on this target?
　　In the past five years, the actual growth rate in China had always been higher than the targeted one. So I think China will probably follow this with the GDP growth exceeding 7.5 percent. China’s rapid growth is really meaningful, as the government wants to provide jobs for its large population. Currently, China is still not rich and this means there is still a big potential for economic growth.
　　To achieve its target, China needs to maintain the current direction, stimulate domestic demand, focus on innovation, continue to strengthen the educational system and develop technologies. Through its managed growth model, it can avoid problems of poverty and economic fluctuations that the United States faces under its policy of laissez-faire, maintain stability and benefit its citizens. I think those policies are totally correct.
　　Some people believe that the international environment after the establishment of the Bretton Woods System provides a favorable external environment for China to develop its economy. It enables China to join the global production chain and thus develop rapidly. But it is also a weakness of the economy. Once the international situation changes, China will inevitably encounter big challenges. Your views?
　　First of all, the Chinese Government is aware of this. The 11th Five-Year Plan emphasizes the stimulation of domestic demand. This is right. Second, China has strong competitiveness and a highly efficient manufacturing industry. This will enable China to withstand external shocks when they occur. The world demand for Chinese products is still strong. I don’t think that China faces big risks.
　　In the Asian financial crisis in 1997, China was not particularly hit. At that time, the Chinese Government adopted responsive economic policies, increasing government investment and stimulating economic growth. China’s short-term development momentum provides a good basis for its long-term development. Luckily, the Chinese Government has played its due role in times of external fluctuations.

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