China is being pressed to revalue its currency. It is a mistake to become obsessed by this. What the global economy needs is for China to grow and for its current account surplus to fall.

Some (inside and outside China) see this as a static zero-sum game for global market share. This is unhelpful. The main issues are growth and the restoration of global demand. The latter is in short supply because of the rise in US savings, caused by the crisis but likely to persist. China has a big contribution to make – in the order of a third of the deficit in global demand. Its high growth figures and rebounding trade, with imports outgrowing exports, suggest the crisis policies are working. But they may have to be reined in to avoid overheating, inflation and asset bubbles. Further, surpluses serve no strategic purpose in a developing country that is fully financing its investment.

The singular focus on the exchange rate appears based on the assumption that it is the key cause of the surplus and the main policy instrument for removing it. The reality is more complex. Reducing the surplus in China involves deep structural change, much as reducing the US deficit does. The high savings in China are embedded in the structure of the economy. The government controls too much income directly and through ownership of the state-owned enterprises. Household income at 60 per cent of gross domestic product is way below international norms and household saving at 30 per cent of disposable income is high. This puts household consumption in the range of 40-45 per cent of GDP. A significant change in both these ratios is needed to sustain growth, make better use of the now large domestic market and guide the structural change in the economy associated with the middle-income transition, and to reduce the surplus without damaging growth.

Without these structural changes, if the currency were floating and convertible (no capital controls), the outcome is most likely to be continued high savings, a trade surplus matched by an outflow of private savings to foreign investments and slow growth. Exchange rate appreciation by itself will not get rid of the surplus.

Rapidly rising domestic demand is essential to sustaining high growth in China. The traditional export sectors are in decline anyway. Incomes are rising. Comparative advantage is shifting to high value-added sectors. Domestic demand and new export sectors are needed to drive growth and guide the structural transformation of the economy, much of which is in the complex middle-income transition. In this dimension, China’s economic interests and global ones are aligned. The excess savings are in the order of 10 per cent of GDP. That needs to turn into household consumption.

It is understood within China that an appreciating currency is needed to sustain pressure for structural change on the supply side. Insufficient appreciation will cause the structural shifts to stall. That will impact productivity growth and incomes.

There are vested interests in China in the status quo. The crisis may have temporarily strengthened their hand. They too tend to hold a static zero-sum version of the issue. Pressing for exchange rate appreciation strengthens their hand. But this resistance is temporary. No one thinks that the transition to advanced country incomes in the next two decades will be built on export-oriented, relatively low value-added, labour-intensive, manufacturing-processing industries.

Will an appreciating currency leave the large rural population few options to advance as labour-intensive exports decline? It is a concern inside China. At this stage of growth, neither a pegged exchange rate nor subsidies are desirable. The export-led manufacturing sector – a big employer in earlier stages of growth – will not be the main source of jobs in the future. That will come instead from the domestic economy, the growing middle class and services they consume.

So China’s growth will require structural change, a shift to the domestic market, the elimination of the current account surplus and an appreciating currency. To be fair, one can view the exchange rate as a trigger for deeper structural reform. The problem is the signal being sent. A narrow focus on the exchange rate signals an incomplete understanding of the complexity of the transition. It plays into the hands of the zero-sum proponents inside and outside China.

The writer received the 2001 Nobel memorial prize in economics and chairs the Commission on Growth and Development

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China’s current account surplus will fall almost half this year, the World Bank predicted yesterday.

The forecast could bolster resistance to appeals expected from Barack Obama to allow the renminbi to appreciate faster.

The decline would be a sign that a stronger-than-expected recovery in China is bringing about some rebalancing of its economy.

The World Bank, which also raised its forecast for Chinese growth this year, said the current account surplus was likely to drop from 9.8 per cent of gross domestic product last year to 5.6 per cent of GDP this year, and to 4.1 per cent in 2010. In absolute terms, the bank forecast that the surplus would fall from $426bn in 2008 to $261bn (€176bn, £158bn) this year and $213bn in 2010.

At its peak in 2007 – when, some economists argue, a large imbalance in China’s favour contributed to the glut of liquidity in western financial markets that precipitated the global crisis – the current account surplus was equivalent to 11 per cent of GDP.

The new evidence of China’s declining external surplus comes before the US president’s first visit to Beijing in 10 days’ time. Mr Obama is expected to encourage China to appreciate its currency to help global rebalancing.

“The reduction in the surplus is quite impressive but it is too early to say whether it will be sustained,” said Louis Kuijs, senior economist at the World Bank in Beijing.

Some of the decrease simply reflected the fact that the Chinese economy was growing strongly while most of the rest of the world was weak, he said. However, he added, “there have also been an accumulation of policy steps that are maybe beginning to start to shift the pattern of growth in China”. The World Bank, which urged China to adopt a stronger currency, said the renminbi had depreciated 7.6 per cent overall against its main trading partners since March as a result of its informal US dollar peg.

In its latest quarterly report on the Chinese economy, the World Bank said growth would reach 8.4 per cent this year, up from its forecast of 7.2 per cent in June, followed by 8.7 per cent next year.

The rebound had been fuelled by “very large” fiscal and monetary stimulus, it said. In the third quarter, new lending increased by the equivalent of 6.5 per cent of annual GDP.

There have been signs that the recovery has been broadening, including a rebound in investment in real estate. Although there were risks that loose monetary policy could spill over into asset price bubbles, China did not yet need to embark on a big tightening, the bank said.

The bank’s predictions about China’s declining external surplus follow a number of upbeat comments by private sector economists. “The global credit crisis has in some ways been good for China because it knows it cannot depend on the drug of exports any more and has discovered the importance of domestic demand,” said Jim O’Neill, chief economist at Goldman Sachs.

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