Eswar Prasad, right, with Ravi Menon, managing director of the Monetary Authority of Singapore, at the Economic Policy Symposium at Jackson Hole in 2011.
Eswar Prasad, once the International Monetary Fund’s top China hand, still finds open doors at Beijing’s top economic agencies.
The slender 46-year-old economist, who holds posts at the Brookings Institution in Washington DC and Cornell University, is in Beijing and Shanghai to discuss a new report he and co-author Lei Ye wrote on the international role of China’s currency, the yuan (also known as the renminbi). At the same time, he’s holding meetings with officials from China’s central bank, banking regulatory commission and China Investment Corp., the country’s huge sovereign-wealth fund.
Mr. Prasad recently sat down for breakfast with the Wall Street Journal’s Bob Davis. Below is an edited transcript:
China’s economy slowed down substantially in the last quarter, leading to expectations that the central bank would sharply ease bank reserve requirements. That hasn’t happened thus far. Why not?
The one word that keeps coming up in meetings is stability. They are concerned about problems later on, (especially a collapse in demand from a recession-battered Europe). They want to keep their policy powder dry.
If they do act, I’d expect an aggressive policy response, which will depend more heavily on fiscal policy than was the case in 2009 and 2010. They know the last stimulus package depended too much on loans and they don’t want to exacerbate problems with banks this time.
Don’t Chinese leaders traditionally feel constrained from taking dramatic action during a political transition, such as the one occurring this year and next?
I understand that Premier Wen has conveyed to agency heads the message: ”I have time left in my term. I don’t want reforms to stagnate.” Wen is trying to prod people to do things. But it’s difficult to see significant reforms in the next few months. He especially is trying to deal with housing so it doesn’t turn into a problem and mar his legacy.
[Note: Chinese media have reported that Mr. Wen has had a series of meetings recently where he has urged further reforms.]
Are the Chinese right to be worried about Europe?
The numbers on Greece just don’t add up. Their output is falling at 7% rate annually and (even with debt restructuring) they’ll wind up with a debt burden of 120% of GDP. It’s unclear how long European countries will continue their support for Greece or how much more pain the Greek population is willing to endure.
Greece is going through a lot of pain without resolving its competitiveness problems. Greece has potential, but it takes enormous political will to make reforms. That political will is now being used for austerity. By mutual agreement of Greece and European countries, I think Greece will eventually exit the Euro zone.
In any event, the turmoil in Europe is not good for China. It implies continued weakness in China’s largest export market, the European Union, and a strong dollar, which also means a strong renminbi. These factors are not good for China’s export prospects.
Your new report predicts that the renminbi will become a reserve currency within 10 years and included in the IMF’s Special Drawing Rights basket of currencies in five years. Did the officials you spoke to agree?
The background tone was that they aren’t in any particular rush to have the renminbi play a big role in global financial markets. On the SDR, I don’t see how the IMF can avoid including them in 2015 when it reviews the system. The Fund is already revising criteria (in a way that would make it easier for the renminbi to qualify). The U.S. wants to offer SDR membership to China like a prize and get something in return. But it’s not a bargain. China isn’t dying to see the renimbi in the SDR.
Do you expect the renminbi to appreciate against the dollar at something close to the 4.7% increase of 2011?
In the short terms it’s hard to make the case anymore that the renminbi is hugely undervalued given China’s falling trade and current account surplus and the minimal reserve accumulation in the latter half of 2011. But over the next two to three years it’s hard to imagine there won’t be pressure for renminbi to appreciate given the higher productivity growth in China relative to its trading partners.
This year, though, if the dollar strengthens significantly, we may see no renminbi appreciation despite the political pressure from the U.S. Chinese domestic political considerations will be the overriding issue.
Do you think China will support an emerging market candidate for World Bank president?
The betting in Beijing is that a U.S. candidate will win because it may be difficult for emerging markets to agree on a candidate. The Chinese feel that their time is coming soon. So they may hold off this time in supporting an emerging market candidate. That would create more of a sense of obligation to pick a World Bank president from an emerging market next time.