러시아ㆍ유라시아

According to a recent report in the New York Times, the economic output of China overtook Japan during the second quarter of 2010, resulting in China becoming the world’s second largest economy. While this was not unexpected—judging by their respective growth rates—the change in status will no doubt give rise to greater international pressure on China to take on the role of a major nation. It also places greater significance on the issue of the Chinese Yuan’s appreciation in order to alleviate international trade imbalances. Nevertheless, the Chinese have said, in a low profile manner, that China is still a developing nation, and that there are tens of millions of people still living below the poverty line in China. They also brought up the issue of per capita income in China, which is still only one-tenth of that in Japan, and used this as justification to say that it is not advisable to make significant adjustments to the Yuan’s exchange rate. The People's Bank even began suppressing an appreciation of the Yuan barely two months after its liberalization. China's latest rapid economic development has been accompanied by the weak economic performance of developed nations and trade imbalances following the global financial crisis. This has led to some nations clamoring for stronger mutual cooperation in order to restore balance to the world economy. Given the various challenges each side is facing, it is conceivable that the issue of restoring balance of trade will become a major topic of debate in international trade forums.

Globalization Trends and Changes in Relative Strength between China and the US

The Sino-American trade imbalance is probably the most representative example of the current global economic imbalance. Both China’s economic rise and the Sino-American trade imbalance are, to a significant extent, caused by social, historical and economic factors within China and the US. In fact, given the trend of globalization, China’s trade surplus is in large part the result of profiteering by multinational corporations from various nations—including, of course, multinational corporations based out of the US. Thus it appears that globalization is one of the major factors that has caused the current imbalance in global trade. The crux of the matter lies in the different policies enacted by various nations during the great wave of globalization, including their speed of implementation as well as whether or not their strategic positionings went along with the tides of globalization.

Globalization is a phenomenon that has involved rapid developments in trade and division of labor since the 1990s. It is a result of technological advances and has been accompanied by astounding growth in international investments, capital markets, and capital flow. Emerging nations, including Mainland China, happened to adopt liberalizing and reform policie, succeeded in attracting foreign direct investments on a scale second only to that of the United States. Mainland China’s abundant manpower, coupled with foreign capital and technologies, has not only enabled it to rapidly expand its importing and exporting sectors, but has also enabled its economy to maintain a continuous growth rate of around 10% for over a decade. By 2009 China had become the world’s largest exporting nation and in 2010 its national economic output exceeded Japan; this enabled China to become the world’s second largest economy after the US. In contrast, the US is saddled with enormous trade and budget deficits. Furthermore, the global financial crisis has exposed the US as having an economy in which consumption exceeds production. In fact, this presents potential risks to the sustained economic growth and value of the US Dollar. The high savings rate of the Chinese public and its abundant labor force are also factors which prompt observers to predict that China’s economy may well overtake the US before 2030. As a result of their reversal in prospects, if not fortune, the international community has been rallying for China to assume the responsibilities of a major nation. The nature of the demands have been diverse, and include calling for reductions in carbon emissions, quickening the appreciation of the Chinese Yuan, assuming greater participation in international affairs, undertaking political reforms, and more.
 

Sino-US Trade Imbalance; Structural Adjustments and the Ideal Exchange Rate for Chinese Yuan

The massive imbalance in Sino-American trade is not just reflected by an imbalance of the respective nations’ external trade, but can also be seen in the imbalance of bilateral trade between them. Handling the trade imbalance will be complex and will no doubt affect their bilateral relationship. Given the increasingly close ties between Asia-Pacific nations and China, the resolution of Sino-US issues, such as the pricing of the Yuan, will also affect China’s trade relationships with its neighbors.

The US suffered overall trade deficits of as much as US$695.9 billion and US$378.6 billion in 2008 and 2009 respectively. The US has maintained particularly massive trade deficits with Mainland China over the years, reaching US$298.1 billion in 2008 and US$197.9 billion in 2009. In both cases, macroeconomic factors played the greatest role; that America’s consumption exceeded production stood out most glaringly. In contrast, the people of Mainland China maintain a higher level of savings given their lack of a comprehensive social welfare system. This has resulted in an economy in which production exceeds consumption. Furthermore, while the US imports consumer goods on a large scale, China is still an emerging nation and has the highest rate of exports in the world. These factors have also seriously affected the imbalance in bilateral trade. In 2008 and 2009, the US trade deficit with China was US$284.8 billion and US$239.9 billion, respectively, constituting 40.9% and 63.6% of the total trade deficit for the US. Thus, China was obviously the largest cause of the US trade deficit. Any time the US wanted to deal with the trade deficit issue, China naturally became a target. As Mainland China has been enjoying a sustained trade surplus, its foreign exchange reserves already exceed US$2.5 trillion. Before the global financial crisis, savings rates in the Mainland were as high as 40%. This was in sharp contrast with the US, where the savings rates were at one time negative. In order for each side to rectify their trade imbalances, their consumption and production structures must be adjusted.

Nevertheless, there is considerable difficulty in adjusting the savings rates in China and the US. At the moment, the US deals with the issue in a variety of ways carried out simultaneously. The US government is acquiring financial institutions which are on the verge of collapsing and is tightening its domestic housing loan market. It is also carrying out reforms on its financial supervision mechanism. At the same time, the US is proposing a National Export Initiative to double exports within five years, demanding the appreciation in the Yuan, and encouraging countries with trade surpluses to adopt means which stimulate domestic demand, among other strategies. Although Mainland China has adopted a stimulus package to raise domestic demand by as much as RMB 4 trillion within two years, the yuan's exchange rate has not risen due to the fact that financial markets possess an interlocking domino effect which would result in wide-ranging adjustments. Another objective issue is that China's foreign exchange market is not completely liberalized. As a result it is difficult to obtain an objective reference price for the yuan in the market. In fact, its value is still very much controlled by the government. Moreover, China’s financial system is concerned with issues such as security improvement and the need for further reforms and perfection of its system.

Appreciation of the Yuan and Internationalization

The global financial crisis, triggered by the sub-prime mortgage crisis in the US, has shown how easily it can form if financial innovation is no longer linked to the basic demands of the industrial economy and enterprises, especially with a lack of financial supervision. The end result is one in which financial institutions take turns failing one by one. That Mainland China’s financial system was relatively unscathed during the financial crisis was mainly due to its lack of internationalization, and is by no means due to it being a comprehensive system. Given that Mainland China’s financial system had not been developed for a long period of time, and its corporate governance and risk management mechanisms are relatively immature, effective management and checks-and-balance in the system will be the key to ensure long-term and stable growth of Mainland Chinese banks.

Almost all of the banks in Mainland China are state-owned enterprises (SOEs). It is a well-known fact that the operating efficiency of SOEs needs to be improved, but this is an area in which reforms are the most difficult to implement. In addition, total assets of Mainland China’s banking industry have already reached two to three times that of its GDP. There are now nearly 5,000 legal entities with nearly 200,000 operating outlets in China employing a total of over 2.7 million workers. If a financial institution was to suffer an operating crisis, the entire financial system's security would be affected. Moreover, business development of Mainland China banks is still very much in its initial stages. Experiments in asset securitization have only just begun and there are currently no CDSs, CDOs, or numerous other financial derivatives, which leaves China considerable room for financial innovation. Likewise, the capital markets and bond markets are still largely in the early stages of development. Mixed operations are an area of financial services which are already well-developed in developed nations. Financial institutions in these countries possess advantages with economies of scale and risk distribution. In contrast, China’s financial institutions have just begun transitioning from providing dedicated services to general services. Given that China's financial system is still developing, the Chinese government is most likely probing many different methods to determine an acceptable level for the yuan. As such the government is extremely cautious with respect to any appreciation of its currency. For the immediate future, China’s main strategy will be to continue strengthening the internationalization of the Renminbi yuan.

Internationalization trend for the yuan

A country's currency can normally be moderated in the foreign exchange market to achieve an appropriate value in order to reduce a budget surplus. However, the position of the Renminbi yuan vis-à-vis the US Dollar is not determined by the market. The yuan's level of internationalization is limited and China’s financial system is still in its infancy with respect to reforms and liberalization, whereas the US Dollar is an international payment tool and a common reserve currency for many nations. The value of the US Dollar as determined by the market does not reflect the trade balance of payment of the United States. In addition, it would be wise to recall that the significant rise in the value of the Japanese Yen during the 1980s did not resolve the US-Japan trade imbalance. As a result of this experience, many people are of the opinion that an appreciation of the yuan is not the best solution for Sino-US trade imbalance. Nevertheless, given that the Chinese economy will almost assuredly continue to experience rapid growth, there is a need to reduce US trade deficits; likewise, the exchange rate between the yuan and US Dollar must be recalibrated. The net effect is that the yuan’s internationalization is a matter of course.

In order for a country’s currency to become an international currency, certain conditions must first be met. For example, the country’s economy must be of certain importance in the global economic system and in international trade. It must have a stable economy and currency value, and its financial system must be comprehensive. As Mainland China is currently experiencing sustained, high-speed growth with respect to its foreign trade, it thus possesses a massive foreign exchange balance. China's economy is now second only to the US, and domestic commodity prices and currency values are relatively stable. Therefore the yuan arguably possesses the necessary conditions for becoming an international currency. If there is one issue that could hamper these efforts, it would be the lack of sophistication of Mainland China’s financial market.

Recent Internationalization Measures of the Yuan

China has traditionally taken a conservative approach with respect to reforms in the financial markets and adjusting the exchange rate of the yuan. Although the international community has been arguing for a suitable appreciation of the yuan following the global financial crisis, it was not until June 19, 2010 that the People's Bank of China began allowing for greater room in the yuan’s exchange rate volatility. The yuan subsequently showed obvious signs of appreciation. By August, however, the yuan once again depreciated in value against the US Dollar and reached its highest level of depreciation in one month over 16 years. This was apparently due to a slowdown in the Chinese economy, and the government was unable to tolerate rapid appreciation of the yuan . It therefore felt forced to intervene in the market, so that in August alone the yuan’s value dropped 0.5%. If this devaluation is consolidated with the appreciation which occurred during the past 6 months, the yuan’s appreciation over a two and a half month period was only 0.3%. Nevertheless, the international communities—including the EU and Japan—have appealed to China in varying degrees for appreciation on RMB. They take the view that a strong yuan is in Beijing’s best interest, since it could prevent overheating of the Chinese economy and a possible asset price bubble. However, authorities in Beijing stressed that the yuan's exchange rate was not the key to redressing Sino-American trade imbalances. They also disclosed that the People’s Bank of China will be allowing Chinese enterprises to invest overseas using the yuan as well as expanding cross-border use of the yuan in order to increase its internationalization while at the same time relieving appreciation pressure for of the yuan. It is clear that such limited adjustment of the yuan’s exchange rate did not meet the expectations of the US or the rest of the international community. There is no doubt that more disputes will occur in the future with regard to the yuan’s exchange rate.

Conclusion: Both Sides Should Share Some of the Blame

China has indeed undergone rapid and significant progress during the past thirty years as a result of reforms to its market economy. In fact, much of China’s progress was well-timed with technological advances and globalization trends as well as other favorable conditions, namely the undervaluation of production resources formed under the original centrally-planned economic system. In addition, China has been able to take full advantage of capital and production technologies of multinational corporations from all parts of the world. These conditions have enabled the Chinese economy to exhibit extraordinary growth to the point of having a considerable impact on developed nations.
 

Given the US’s serious trade and budget deficits, the Obama Administration must devote considerable effort to reduce at least the trade deficit—and China is the greatest source of US trade deficit. Moreover, China has accumulated huge foreign exchange reserves. Thus, correcting the yuan’s exchange rate has become the main target for addressing the trade imbalance. However, the relative decline in the US’s economic power is not only reflected in its manufacturing industry—it also extends to its service industry. Trade imbalances between them have subsequently continued to enlarge. This, coupled with the existence of poorly functioning financial market systems and the problem of consumption exceeding production, indicates that developed nations may have limited capacity to make full economic recoveries.

The international trade imbalances are a result of complex factors which exist in the economies of each respective nation. The appreciation of the yuan is not the sole effective solution. Nevertheless, a rapid accumulation of foreign exchange earnings will add pressure on China in the form of inflation and an asset price bubble. It seems inevitable for the yuan to appreciate in value in the future. Indeed, the Chinese economy faces several potential problems as it develops rapidly. This is particularly true because China’s economic reforms were only initially conducted on a pilot scheme basis before being gradually promoted on a national-scale; reforms were first implemented in coastal regions and then only later worked their way inland. This resulted in a small percentage of the population becoming wealthier at a much faster pace before the influence gradually spread. However, regions which developed earlier had already seriously impacted the international community; thus the international community demanded that China shoulder the role of a major nation. But a major gap still exists between the minority who quickly became wealthy and the rest of the population, who have remained relatively poor. This leads to China still having to figure out how exactly to deal with the enormous disparity between the rich and poor classes.

China has also been actively participating in regional economic integration over the past few years, and its cooperation has demonstrated proactive market liberalizations for the mutual benefit of all. In other words, China has not been condescending to neighboring nations and has not forcibly demanded that they open up their markets. This attitude conforms to the philosophy of Deng Xiaoping on China’s need to "maintain a low profile”. The ECFA reached between China and Taiwan, including the fact that both sides have set aside their political disputes to which there is no common understanding and have instead worked to handle negotiations based solely on economic issues, has demonstrated China's pragmatic approach and desire for a peaceful rise in power. In the future Asia will undergo major economic integration. If China continues to undertake regional integration solely from an economic perspective, and avoids links to sensitive political issues, its actions would no doubt bolster regional security as well as foster regional economic integration.
The factors causing the Sino-US trade imbalance are numerous and varied. The imbalance cannot be redressed by way of any single policy, measure, or nation. Had there not been an excessive trade surplus or deficit, in reality there would not be a need to maintain balance in bilateral trade. In the case of China and the US, the immensity of the trade deficit shows that both sides’ systemic and structural factors must be adjusted. In fact, both sides must improve on their own shortcomings before the major imbalance can be resolved or reduced. Each country must pragmatically deal with its industrial economy, establish more effective supervisory mechanisms, improve irrational financial risk return, jointly strengthen reforms to their systems, and reduce gaps between their economies.