China Global Imbalances, Reserve Currency, and Global Economic Governance
Global imbalances, Reserve currency, and Global economic governance
The accepted hypotheses for the root cause of global economic imbalances are:
1) East Asian economies’ export-led growth: recently the integration with international markets leads to an import and export expansion making the trade surpluses in EA dramatically increase. It had a great success in EA producing higher living standards and poverty rates declining. This cannot be the main cause for the emergence of large global imbalances in 2000 and thereafter since before 2000 EA economies’ TB were roughly balances.
2) Self-insurance motivation for foreign currency reserve accumulation: after the financial crises in the late 1990s, emerging market economies in EA increased their CA surpluses substantially, and they experienced rising international reserves. After 2005 Chinese surpluses and reserves are too large to be justified by the self-insurance motivation.
3) China’s exchange rate policy: the g.i. started to grow in 2002 and China has been accused of causing the imbalance sustaining a large undervaluation of its real exchange rate since 2003, but it is not true because:
• China trade surplus did not become large until 2005
• RMB appreciated against US$ by 20% in 2005-2008 but the global imbalances continued to grow
• Most other developing countries also increased their CA surpluses in the same period (if exchange rate was the cause, the other countries that compete with China would have experience declining trade surpluses and reserves)
→The need for an alternative hypothesis: these hypotheses imply that the EA economies are driving the g.i. but is not consistent with the basic statistics. While the US trade deficits with China did increase substantially, the share of the US trade deficit due to EA economies as a region actually declined significantly. The three hypotheses surely contributed but they cannot be the main cause of the global imbalances.
→An alternative hypothesis consistent
The accepted hypotheses for the root cause of global economic imbalances are:
1) East Asian economies’ export-led growth: recently the integration with international markets leads to an import and export expansion making the trade surpluses in EA dramatically increase. It had a great success in EA producing higher living standards and poverty rates declining. This cannot be the main cause for the emergence of large global imbalances in 2000 and thereafter since before 2000 EA economies’ TB were roughly balances.
2) Self-insurance motivation for foreign currency reserve accumulation: after the financial crises in the late 1990s, emerging market economies in EA increased their CA surpluses substantially, and they experienced rising international reserves. After 2005 Chinese surpluses and reserves are too large to be justified by the self-insurance motivation.
3) China’s exchange rate policy: the g.i. started to grow in 2002 and China has been accused of causing the imbalance sustaining a large undervaluation of its real exchange rate since 2003, but it is not true because:
• China trade surplus did not become large until 2005
• RMB appreciated against US$ by 20% in 2005-2008 but the global imbalances continued to grow
• Most other developing countries also increased their CA surpluses in the same period (if exchange rate was the cause, the other countries that compete with China would have experience declining trade surpluses and reserves)
→The need for an alternative hypothesis: these hypotheses imply that the EA economies are driving the g.i. but is not consistent with the basic statistics. While the US trade deficits with China did increase substantially, the share of the US trade deficit due to EA economies as a region actually declined significantly. The three hypotheses surely contributed but they cannot be the main cause of the global imbalances.
→An alternative hypothesis consistent