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China-bashing and trade frictions won't fix economic imbalances
By Sun Lijian |
January 21, 2010, Thursday
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Print Edition
Print Edition
WHILE the need to exercise stricter supervision over financial innovation has been recognized by many market regulators, consensus on the root cause of global economic imbalance is still elusive.
Indeed, many people are receptive to the misguided belief that with its huge trade surplus, China is solely to blame for leaving the world economy imbalanced as it is today.
Trade spats between China and the United States, they argue, may force China to allow the yuan to appreciate against the US dollar and adopt policies that will stimulate Chinese domestic consumption of imported goods.
People in thrall to this argument have joined the chorus of China-bashing. But those who ascribe the global imbalance to China's trade surplus are barking up the wrong tree, for appreciation of the yuan and self-imposed export quotas on China's part can do little to rectify the yawning imbalance.
Some critics still see China's trade surplus through a zero-sum lens, with the West clearly being the loser.
However, ordinary consumers in these nations have largely benefited from the broader range of choices made possible by inexpensive imports.
The outflow of capital from the US to China is actually good for the restructuring of industries in the US. Over-protection of industries that should have been phased out but continue to milk the state is an act of irresponsibility toward consumers and taxpayers.
The fact that China has become the largest holder of US Treasury bonds has led some to think that China now has the wherewithal to rebalance the global economy.
Nonetheless, China's alluring current account figures are a poor yardstick for gauging the country's overall wealth, since they can't be easily monetized.
While the US boasts no such enviable figures, US companies can cash in handsomely on their brand recognition, market penetration and global reach.
For China, a country where per capita annual income still stands at a meager US$3,000 to US$5,000, isn't it irrelevant to judge its wealth by digits on the books rather than by real market potential?
The yuan appreciated nearly 20 percent in the three years since July 2005, when China de-pegged its currency from the dollar. Despite this appreciation, China's trade surplus with the US continued to snowball.
Although the exchange rate between the yuan and dollar hasn't seen any significant changes after the financial tsunami in 2008, China's trade surplus dropped markedly due to plummeting overseas demand. This shows the impact of exchange rate changes is minimal and short-term in nature compared with the role played by economic fundamentals.
The scenes of Chinese shoppers snapping up luxury goods abroad also fuel the wrong notion that China has enough affluent people to spend the world out of its recession.
But due to several structural constraints, for example the immaturity of the domestic high-end commodity market, China's government stimulus is unable to entice its spendthrift consumers into a domestic buying spree that may reduce the current account surplus.
Two factors influence the balance of trade. One is periodic economic ups and downs.
A spike in unemployment can spell changes to exchange rate, interest rate and fiscal policies, which in turn can affect the trade volume.
But in an era of globalization in which China and the US are inextricably intertwined, these changes can only pay transient dividends.
The other factor is a structural one. When the US economy descends into a downward spiral, the imbalance triggers tension. But when the US economy resumes prosperity, the clamor for redressing the imbalance will be quickly quelled because of the win-win results of foreign trade.
This imbalance is rooted in the economic structures of China and the US, one characterized by heavy saving for a rainy day, the other by excessive personal consumption. Both countries have more to gain by revamping their economic structures than by ratcheting-up trade frictions.
(The author is a professor and executive vice dean of the School of Economics of Fudan University.)
Indeed, many people are receptive to the misguided belief that with its huge trade surplus, China is solely to blame for leaving the world economy imbalanced as it is today.
Trade spats between China and the United States, they argue, may force China to allow the yuan to appreciate against the US dollar and adopt policies that will stimulate Chinese domestic consumption of imported goods.
People in thrall to this argument have joined the chorus of China-bashing. But those who ascribe the global imbalance to China's trade surplus are barking up the wrong tree, for appreciation of the yuan and self-imposed export quotas on China's part can do little to rectify the yawning imbalance.
Some critics still see China's trade surplus through a zero-sum lens, with the West clearly being the loser.
However, ordinary consumers in these nations have largely benefited from the broader range of choices made possible by inexpensive imports.
The outflow of capital from the US to China is actually good for the restructuring of industries in the US. Over-protection of industries that should have been phased out but continue to milk the state is an act of irresponsibility toward consumers and taxpayers.
The fact that China has become the largest holder of US Treasury bonds has led some to think that China now has the wherewithal to rebalance the global economy.
Nonetheless, China's alluring current account figures are a poor yardstick for gauging the country's overall wealth, since they can't be easily monetized.
While the US boasts no such enviable figures, US companies can cash in handsomely on their brand recognition, market penetration and global reach.
For China, a country where per capita annual income still stands at a meager US$3,000 to US$5,000, isn't it irrelevant to judge its wealth by digits on the books rather than by real market potential?
The yuan appreciated nearly 20 percent in the three years since July 2005, when China de-pegged its currency from the dollar. Despite this appreciation, China's trade surplus with the US continued to snowball.
Although the exchange rate between the yuan and dollar hasn't seen any significant changes after the financial tsunami in 2008, China's trade surplus dropped markedly due to plummeting overseas demand. This shows the impact of exchange rate changes is minimal and short-term in nature compared with the role played by economic fundamentals.
The scenes of Chinese shoppers snapping up luxury goods abroad also fuel the wrong notion that China has enough affluent people to spend the world out of its recession.
But due to several structural constraints, for example the immaturity of the domestic high-end commodity market, China's government stimulus is unable to entice its spendthrift consumers into a domestic buying spree that may reduce the current account surplus.
Two factors influence the balance of trade. One is periodic economic ups and downs.
A spike in unemployment can spell changes to exchange rate, interest rate and fiscal policies, which in turn can affect the trade volume.
But in an era of globalization in which China and the US are inextricably intertwined, these changes can only pay transient dividends.
The other factor is a structural one. When the US economy descends into a downward spiral, the imbalance triggers tension. But when the US economy resumes prosperity, the clamor for redressing the imbalance will be quickly quelled because of the win-win results of foreign trade.
This imbalance is rooted in the economic structures of China and the US, one characterized by heavy saving for a rainy day, the other by excessive personal consumption. Both countries have more to gain by revamping their economic structures than by ratcheting-up trade frictions.
(The author is a professor and executive vice dean of the School of Economics of Fudan University.)
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