China Likes the Status Quo
Robert Engle is a Nobel Prize-winning economist. After completing his Ph.D., Engle was a professor of economics at the Massachusetts Institute of Technology from 1969 to 1977. He joined the faculty of the University of California, San Diego (UCSD) in 1975, where he retired from in 2003. He now is a Professor Emeritus and Research Professor at UCSD. He currently teaches at New York University, Stern School of Business where he is the Michael Armellino professor in Management of Financial Services. Engle is also the co-founder of the Society for Financial Econometrics (SoFiE). He won the Nobel Memorial Prize in Economic Sciences in 2003.
Question: Will China cut off its credit line to the U.S.?
Robert Engle: I don’t think it can. The – I mean, what the only way China – China’s got this big problem, which is so much of its reserves are tied up in dollars so that if it were to cut off the credit line in dollars, how would it maintain the exchange rates, the fixed exchange rate that it has. I mean, it would only be able to do that if it allows the yuan to appreciate. And so, it’s accumulating dollars because they sell goods to the U.S., the dollars show up in China, what do you do with those dollars? Well, you can either buy Treasuries with them, you could hold them in green piles in the bank, but that’s really the same thing. You can buy goods in the U.S., which is what we would like them to do, and if – I mean I think ultimately that’s what should happen. I think ultimately China will decide they are a big player in the international economy, they will not be able to maintain the fixed exchange rate, they’ll have to go to a floating exchange rate and their dollars that they own will depreciate because yuan will appreciate relative to the dollar. So, in fact, some of their nest egg will be eroded by doing that. So, they’re not anxious to do this. They prefer the status quo. All the talk they have, in my opinion they have about the U.S. doing – moving to special drawing rights, or some other kind of reserve currency isn’t really what they want. They like the status quo, the way it is now and I think they’re going to continue this way as long as they possibly can, but ultimately are going to have to let the economy open. It’s just too big an economy. You can’t run it without allowing capital flows in and out.
Question: How will China’s growing middle class change the relationship between China and the U.S.?
Robert Engle: See now I think what’s going to ultimate happen. If the Chinese economy can be opened so that currencies are convertible, Chinese tourists can take money and go see the world. Chinese businessmen can go and buy property in the U.S. and France and every place. All of a sudden, it’s just going to be a blossoming global economy. I think it’s going to be good for everybody. And I think the Chinese consumers are going to ultimate drive that because they have a lot of money, many of them do now. And they don’t really have an easy way to spend it. They don’t have an easy way to travel.
When Japan was this big power in – and grew so rapidly in the, I guess the ‘80’s, we saw Japanese tourists everywhere for the first time. It was the first thing we saw. But we don’t see this large influx of Chinese tourists as what we would expect to see. And New York is one place where you might expect to see a lot more of them. It’s gonna happen, they travel all over China. You go to China and you see it’s all the tourist spots are full of people, but they’re all Chinese tourists because that’s where they go. That’s, you know, they can’t really go out of the country very easily. So, I think it’s going to be a happy day for everybody in China and outside of China when these borders are opened a little more.
Recorded May 25, 2010
Interviewed by Andrew Dermont
At some point, however, the country will have to let the yuan appreciate and allow cash flows in and out of the country.
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