A Nobel Winner's Rx for China

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Also, tell her to do the best she can to meet the objections and complaints about intellectual property rights and treat very seriously issues such as food supply chain.

What would happen if China stopped buying U.S. treasuries with its additional reserves?

This would have a little impact possibly on interest rates—a small impact. If China stopped buying foreign exchange assets, the balance-of-payments situation would change. The U.S. has a deficit in large part because other countries finance it. If the rest of the world stops financing it, the deficit will go away.

But I don't want the U.S. deficit to go away, because the U.S. deficit is very good for the rest of the world. Right now, it's fuel for growth of the world economy and supplies liquidity to the world. But in the long run we have to take some burden off the United States from the dollar's role as the global currency.

How much longer will the dollar remain the principal global currency?

The dollar has been the major world currency since early World War I, when it replaced pound sterling—and it's going to continue for a long time to come, as long as the U.S. remains the No. 1 power and the most innovative power, and as long as the U.S. economy is strong.

When will China become the most dominant economy?

It will be a long time before China's s standard of living will approach the U.S. It might be 100 years; I see the dollar era lasting another century.

What do you think of China's building up a fund like Singapore's Temasek to spend its huge hoard of reserves? (See BusinessWeek.com, 3/12/07, "China's Giant New Investment Agency".)

China has built up $900 billion in foreign exchange reserves in the past decade, vastly more than any other country in history. The rest of the world, and particularly the U.S., has allowed China to do this. It's absolutely important that China use these reserves responsibly.

What does responsible investment mean?

The whole question of using it as a way to take over companies—if not done responsibly—would be rejected in many countries and they would be shut out. The whole spirit of the world economy would be lost.

Isn't there too much paranoia about the rise of China and that was why its oil company, CNOOC, was thwarted from buying Unocal?

Yes, this example was a warning that this issue is a very sensitive one to the rest of the world.

How does that compare to the rise of Japan and its purchase of Manhattan real estate properties and media companies in the 1980s?

There was [some] fear of Japan buying too many properties and increasing control in the 1980s, and the U.S. reaction was the Plaza Accord when they forced Japan to appreciate the yen [leading to] serious damage to the Japanese economy. China should look at the example carefully. That's why it's not in China's interest to have a big appreciation forced upon it.

Finally, what do you make of the big discrepancy in prices for Chinese shares with dual listings which are so much higher in China than in Hong Kong?

This big gap between prices of shares in Hong Kong and China is an element of the lack of financial integration and the fact that the yuan is not convertible. It's waving the flag that shows China's financial development is still immature.

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.