Growing, At Last

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The primary focus of U.S. attention today is China, whose economy continues to grow apace and attracts huge amounts of foreign direct investment an eye-popping $53.5 billion last year. For months now, American economists and politicians have been fretting publicly over whether China is overheating, whether it is the next Asian meltdown-in-waiting and how long its currency can remain so blatantly undervalued against the dollar.

Fang was bemused by such talk. A Stanford man who joined the board for the first time this year, he said there is no reason to think that China's economy will soon boil over simply because it's growing at about 8% to 9% a year. Japan, he pointed out, averaged a growth rate of about 10% for 25 years during its big developmental leap starting in the 1950s. China's inflation is relatively low, and a huge surplus of workers in China keeps the labor market humming and cheap. The starting salary of an average Chinese college graduate today is one-third lower than it was three years ago, Fang said, and 30% or more of graduates can't find jobs despite the 9.1% growth rate. "Wage pressure is nowhere to be seen," he said, and the foreign investment in the Chinese economy may sound huge but still represents only 10% of total investment. That suggests China is less dependent on foreign investment for its growth than other Asian economies have been and thus is less likely to fall victim to the meltdown that hit them in the 1990s, when investment dried up.

Sure, there are signs of overheating in some sectors. The number of cars sold in China doubled last year, to more than 2 million, for example, and the real estate market in some coastal regions is frothy. But the central bank is trying to thwart overspeculation. Fang regrets not buying an apartment in Shanghai when he moved there a year ago; prices have jumped 60% since then. "The room for policy maneuver is very big, and we shouldn't be concerned about overheating," he said.

Should the Chinese currency now pegged to the U.S. dollar appreciate against the dollar? China is under growing pressure from the U.S. to adjust the rate or let it float. The argument, made vociferously by the White House, is that the current exchange rate artificially cheapens China's exports, to the detriment of American jobs and the U.S. trade deficit. The trade gap with China is more than $100 billion. Naim called the current rate of $1 to 8.3 yuan "the world's most dangerous number." At issue, he said, is whether it will change in an orderly manner "or suddenly, surprisingly, and unleashing a wave of instability."

Fang had a different perspective. The exchange rate "has served China very well, and we don't want to change voluntarily," he said, although none of the board ruled out the possibility that the country could eventually yield to U.S. pressure. But "it's wrong to focus so much energy on the exchange rate," Fang argued, noting that even a 5% movement wouldn't do much to help plug the U.S. trade deficit. It would be far smarter to address concerns like China's uncompetitive service sector allowing foreign banks to set up shop, for example. "China can open up a lot more to the outside world. That's a much more constructive way to solve the problem," he said.

The other fearsome exchange rate, of course, is between the euro and the dollar. The euro has taken the brunt of the dollar's depreciation the greenback has dropped more than 30% against the euro over the past two years. Naim foresees U.S. competitors grabbing European market share "and a wave of European companies investing in the U.S., where they'll find companies 30% cheaper." Blanque calculates that each 5% appreciation of the euro against all currencies translates into a loss of European-GDP growth of 0.5%.

Yet the French economist, like Fang, warned against excessive focus on currency. Governments, particularly in France and Germany, need to continue reforming their economies to boost productivity, reduce the relatively high cost of labor and find better investment uses for a huge pool of savings that is sitting in bank accounts that yield very low returns. France's savings rate is higher even than Japan's. "The strength of the euro highlights European structural problems; it doesn't cause them," Blanque said.

Naim and Tyson quickly took issue with him. "It's amazing how little worried the Europeans are about the euro," Tyson said, pointing to two controversial areas: the European Central Bank's relatively tight monetary policy and the E.U.'s battered Growth and Stability Pact, which long required governments to limit their debt and budget deficits. Exchange rates matter, she contends. The past 10 years were "a lost decade" for Germany because among other reasons the former West Germany reunified with the former communist East Germany at an exchange rate that was too high. "How many times do you go through this?" she asked, incredulously.