This is important and should not be underestimated.
Wen's argument is that:
..."forcing Beijing to revalue its currency would lead to a "disaster for the world"".
Why? Because of the increased changes of social unrest of course. In this blog this is something I have been writing about for months if not years. This factor has been key to China's exchange rate policy all along. His warning is correct:
"Many of our exporting companies would have to close down, migrant workers would have to return to their villages".
"If China saw social and economic turbulence, then it would be a disaster for the world".
This issue needs close attention.
So let us now look what George has to say:
"China must fix the global currency crisis"[FT]
The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.
Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation but it works much better.
This has been the secret of China’s success. It gives China the upper hand in its dealings with other countries because the government has discretion over the use of the surplus. And it protected China from the financial crisis, which shook the developed world to its core. For China the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.
It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat. Its currency moves have had a decisive influence on exchange rates. Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.
I would ask again that readers refer to my previous post on what China can actually do with its surplus. Surplus' are not always good.