LIKE THE CUBS’ PROVIDING ADVICE ON HOW TO PLAY BASEBALL

7/21/11

Today’s (i.e., Thursday, July 21’s, page A12) Wall Street Journal reports that the IMF is urging China to adopt

…a stronger currency, higher interest rates, reduced advantages for big state-owned enterprises, and a liberalized financial sector.

These ideas have some merit, but they will be, for the most part, ignored. One can understand China’s reluctance to let the yuan appreciate substantially; the Chinese hold a lot of dollar denominated assets ($1.3 trillion in treasuries alone), so letting the dollar depreciate would result in quite a blow to their reserves. (See two posts on this subject, LOOK WHO’S PULLING THE RICKSHAW NOW, 6/21/10 and YUAN I SHOULD BUY SOME MORE STUFF FROM YOU?, 3/8/11) Chinese officials deny this, arguing that conversion is little more than a remote, theoretical possibility, but to deny such an impact is the equivalent of denying the tides. And one suggests a bit of disingenuousness in their denials. But I digress.

While the Chinese will understandably pay little more than lip service to letting the yuan rise, they will get positively apoplectic at the suggestion from the IMF that they liberalize their financial sector. Yes, liberalizing the financial sector is advisable, and in all likelihood necessary, if China is to become the economic and financial superpower its potential indicates it will. However, an understandable reaction from the Chinese is something like

Where does the West get off lecturing us on how to run a financial sector?…and indeed they have a point. After our, and especially the U.S.’s, financial sector nearly drove the world into the depths of new economic dark age, where indeed do we think we get the authority to lecture the Chinese on running their financial sector?