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Reflect on 'China's Responsibility' Theories
UPDATED: August 27, 2010 Web Exclusive
China Not Full-Fledged Creditor


China's status as the world's biggest creditor nation has yet to be fully established, and it should not undertake any responsibilities in that capacity, said Ba Shusong, Deputy Director of the Institute of Financial Studies of the Development Research Center of the State Council.

From an economic perspective, the rise of every major creditor nation was attributable to sustained and rapid growth, Ba said in an interview with People's Daily. The evolution of the international monetary regime shows the establishment of a major creditor nation is always associated with the strengthening of its status in that regime. It may even lead to the creation of a new international monetary regime.

For instance, Britain's status as a major creditor nation laid the groundwork for the gold standard. Its later decline and the ensuing rise of the United States resulted in the end of the gold standard and the establishment of the U.S. dollar as an international currency. After the 1980s, given the chronic deficit in the U.S. current account and the rise of Germany and Japan, the gold-dollar regime under the 1944 Bretton Woods Agreement collapsed. Since then, there has been no unified international monetary regime. After the Japanese yen adopted a floating exchange rate, Europe, led by Germany, boosted its influence in the international monetary regime by launching the euro and creating an optimum currency area.

Ba said a well-established creditor nation should meet two criteria: sustained growth and a persistent trade surplus" and having a major influence in the international monetary regime. The emergence of China as a new creditor nation is a result of its economic growth. But, as the yuan remains far from influential in institutions such as the International Monetary Fund and the international monetary regime, China's status was not well established and should not entail responsibilities beyond its capacity.

Global imbalances

In terms of per-capita GDP, China ranks below more than 100 other countries worldwide. Its emergence as the world's biggest creditor results mainly from global division of labor, Ba said. It is also attributable to spending and saving imbalances across the world as well as the stagnant reform of the international monetary regime.

China became a creditor nation as its savings increased and consumption decreased. The United States turned itself into a debtor nation as its savings dropped and consumption soared. Before the financial crisis, China's savings rate reached a record high of 51.3 percent in 2008, as opposed to the record low of 12.6 percent for the United States.

The unequal status between creditor nations and debtor nations reflects differences between producer countries and consumer countries, Ba said.

Moreover, China's status as a creditor nation exposes flaws in the international monetary regime, he said. The U.S. dollar will undergo a long-term depreciation because of the financial crisis and the United States' current account and fiscal deficits. But the dollar remains a dominant currency in the international monetary regime-an advantage helping sustain the U.S. model of low savings and high consumption. Despite China's persistent current account surplus and sound fiscal conditions, the yuan has yet to exert a major influence. Since it is not a regional or international currency, China cannot provide the yuan to other countries to offset its current account surplus. In these circumstances, China could not but passively accumulate dollar assets and become a creditor nation to the United States.

Diverse risks

The deficit between the revenues generated by China's foreign investment and foreign countries' investment in China is also evidence China is not a full-fledged creditor, Ba said. In theory, a country's balance of payments determines its ability to allocate resources worldwide and generate investment returns. A well-established creditor nation should not only possess a trade surplus and net overseas assets, but also generate net profits from its overseas investment.

An abnormal phenomenon has emerged given the unequal international monetary regime: The United States, both the world's richest country and its biggest debtor, is able to maintain a surplus in investment returns. China, by contrast, suffers a chronic deficit as a developing country and an emerging creditor nation.

China's immaturity as a creditor nation may give rise to risks of asset losses, Ba said. First, there is a risk of market value of its overseas assets decreasing. Most of China's overseas assets are U.S. Treasury bonds and institutional debts. If their rate of return declines, the market value of China's dollar assets will go down. Second, the appreciation of the yuan over foreign currencies, especially the dollar, could also cause asset losses. Since China's overseas assets are denominated in foreign currencies, the appreciation of the yuan over major currencies will lead to net losses on China's balance sheet.

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