China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it. (New York Times)

Economist Paul Krugman devoted his latest column to a discussion about the RMB and the need for revaluation. His description of the problem seems spot on to me, and it sounds like Krugman pretty much agrees with Bernanke’s ideas about China’s purchase of dollar assets, particularly mortgage-backed instruments, and the effect on US interest rates and the financial crisis in ‘08 – I like Bernanke on this topic as well.

My only criticism of the column, such as it is, concerns solutions.

Krugman did not really have enough space to deal with the issue of how China can “fix” the problem, and unfortunately I think it leaves the reader thinking that the current policy can be reversed overnight with no major losers. In fact, use of the term “bad behavior” makes it sound like China is doing all this to hurt other nations, as opposed to protecting its own economy (in the short term).

Krugman knows this of course, but a lot of his readers probably do not. While it is certainly accurate to point out that the current RMB policy (and the makeup of China’s economy) has resulted in beggar-thy-neighbor effects in the international trade area, solutions are neither easy nor able to be done quickly.

I think it was Stephen Roach at Morgan Stanley (don’t have a link here, sorry) who recently stated that focusing on the value of the RMB wasn’t particularly useful. Better to discuss China’s efforts to rebalance the economy, provide for a social safety net for its people, etc.

I’m more comfortable having that discussion that in simply pointing fingers at China and saying “You’re the bad guy.”

I wrote many years ago, way back on my first China law blog in 2003, that something needed to be done on the RMB’s value. My criticism at the time, and since, has been that 1) cries for 40% revaluation were crazy; 2) threats to raise tariffs on Chinese imports (by the US) were not productive; and 3) a lot of work needed to be done domestically before a rapid revaluation could be done.

Many years have now gone by. The speed of rebalancing, and then revaluation which would follow, have been too slow. So criticism is certainly valid. But what’s a country like the US supposed to do? Yell at Hu and Wen for the value of the RMB, or support them in their efforts at putting a social safety net in place in China and pulling back on the “Growth First” economic theories of the past 15 years?

I obviously support the latter approach. At the same time, the US should, and does on a routine basis in diplomatic fora, call for faster currency liberalization and revaluation on a shorter timeframe.

Krugman is absolutely correct in his facts. I just would have preferred a more constructive discussion and tone, as opposed to a confrontational look at China’s “bad behavior.”