In the 1970s, China injected itself with economic reform.  Now, in 2010, China appears afflicted by a menacing strain of that reform that is either constraining a global economic recovery or, worse, capable of creating a new economic pandemic.  While China’s emergence as an economic powerhouse has rightly grabbed our attention, however, the trends are not new, and there are some predictable similarities between China’s economy now and Japan’s in the 1980s.  It is critical that China address the serious flaws in its economic structure, but we should remember we’ve seen this before, although perhaps not on this scale. 

This hearing is about China’s currency policy and global imbalances.  Like the IMF has, I can stipulate that China’s currency is undervalued, plain and simple.  I can also agree with G20 leaders that the world has steep imbalances that must be corrected.  But let’s not lose sight of the fact that there are fundamental problems with China’s economy, and let’s not pretend that China’s intervention in the currency markets, by itself, is the root cause of our ten percent unemployment or of China’s ten percent annual GDP growth.

We’ll hear today from some pretty bright economists on the problems with China’s economy.  I’m looking forward to hearing what they have to say.  My going-in view is that China’s deliberate and dangerous wealth transfer from everyday households to inefficient export-platform factories is standing in the way of the domestic consumption that the Chinese (and the rest of the world) believe the Chinese (and the rest of the world) so desperately need.  China must introduce global best practices into its banking sector, mature its financial markets, better protect intellectual property rights, and open more comprehensively to foreign direct investment.  China also should open its markets much more fully to all goods and services, particularly those coming from the United States. 

An increase in the value of the RMB will facilitate some of these measures.  For others, the much-sought currency appreciation will be a happy—though perhaps unintended—offshoot of the broader reform.  All of these measures will help China move toward liberalizing its capital account, which should be the ultimate goal for all of us, because none of us can know the true extent of RMB undervaluation until the currency floats.

In my view, however, when it comes to China, focusing on the currency valuation issue to the exclusion of the others is more likely to lead to collective frustration than to any improvement in the health of the critical U.S.-Chinese economic relationship.  But, that said, while we shouldn’t obsess over the value of the RMB, it would be an enormous mistake to give up on addressing it. 

To that end, I believe the Obama Administration should continue to address China’s currency policy in high-level bilateral summits, like the Strategic and Economic Dialogue.  I think the Administration should restart languishing Bilateral Investment Treaty negotiations with China and prompt it to make progress on the currency and broader issues as part of the BIT process.  I also believe the Administration should devote time and resources toward attempting to establish a robust, multilateral process—either in the G20, IMF, or elsewhere—so that other countries, particularly some of China’s neighbors in Asia, can bring new points of pressure to bear.  I would hope that China would commit to this multilateral process and participate in good faith. If China wants to be treated as a major international player, it has to own up to the responsibilities of that status.

By a similar token, if the United States wants to maintain its status as the international leader, then we better make sure that whatever we do to address China’s currency regime, we do it without losing sight of our international commitments and the overarching value of the multilateral trading system. I am wary of panicked approaches whose supporters concede are inconsistent with our obligations, but then try to justify those inconsistencies by casually asserting that the normally applicable rules just shouldn’t apply.  

So far, I’ve focused on China.  Let me close by saying I fully admit the United States needs to get its fiscal house in order.  China wouldn’t be accumulating hordes of currency reserves and U.S. Treasuries if the United States stopped racking up debt at the current unsustainable pace. 

Thank you, Mr. Chairman, I yield back.