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4851. Does China Save and Invest Too Much?

Author:
John H. Makin
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
China’s current saving and investment levels are extraordinary— both in terms of its own history, but also by comparison with the current and historical experience of high-saving countries like Japan. The International Monetary Fund’s 2005 World Economic Outlook places China’s gross saving at 50 percent of GDP with gross capital formation, not far behind, at 45 percent of GDP (IMF 2005: 96–97). High levels of saving and investment are usually seen as a good thing. For a developing economy, such as China, a high level of domestic saving and investment means that residents are forgoing current consumption in order to add to the capital stock, thereby increasing growth and labor productivity. For a developed economy like the United States, while absolute levels of saving and investment may not match those in developing economies, a high level of saving and investment would mean that residents are financing most of the increase in the capital stock and are thereby positioning themselves to benefit from future returns earned by the enlarged capital stock. The reality for the United States over the past half-decade—a sharp rise in imports of foreign savings—means that returns from growth in the capital stock are increasingly earmarked for payment to foreign investors. Despite the satisfaction with which most commentators view its high levels of saving and investment, particularly since 2002, China has displayed increasing signs of overinvestment. As used here, the term overinvestment refers to a capital stock either too large or too poorly allocated to generate positive returns at the margin. Misallocated capital and excess capacity in the domestic sector implies a rapid increase in nonperforming loans, which are largely held by China’s state banks. Excess capacity in the tradable goods sector implies a tendency to undervalue the exchange rate in order to maintain the growth of demand for exportables.
Topic:
Economy, Economic Growth, Investment, Currency, and Savings
Political Geography:
China and Asia

4852. Do Financing Biases Matter for the Chinese Economy?

Author:
Yasheng Huang
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is widely acknowledged that China’s financial system is deeply troubled. Its banks have very high nonperforming loan ratios and its stock market has lost 50 percent of its value since 2001 amidst a GDP growth rate averaging some 9 percent a year. Those facts about the accounting aspects of China’s financial system are becoming better known in the West. However, what has not been sufficiently highlighted is the precise effect of China’s dysfunctional financial system and its broader pattern of allocating resources—in favor of the state sector at the expense of the private sector—on the Chinese economy and society. Probably the only reason economists and business analysts have found it hard to reconcile the accounting aspects of China’s financial system with the performance aspects of the Chinese economy is that China’s GDP growth has been so impressive. Some experts (e.g., Rawski 2001,Young 2003) have argued that China’s economic performance has not been as impressive as the official statistics indicate. Their work in this area delves into rather specialized and arcane areas of Chinese methods of compiling and reporting data. While this work is analytically important and does resolve some of the puzzles of China’s rapid growth, it is very technical and difficult for nonspecialists to understand. Thus, it is unlikely to grab readers’ attention away from newspaper headlines touting the rise of China and the huge trade surpluses that country has accumulated.
Topic:
Economics, Finance, Economy, Banking, and Bias
Political Geography:
China and Asia

4853. A Proposal to Privatize Chinese Enterprises and End Financial Repression

Author:
Deepak Lal
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
China’s remarkable economic performance during the last two decades has rightly been hailed as an economic miracle. In this article, I briefly summarize the sources of the miracle, outline the serious problems China still faces because of the continuing financial repression necessitated by its unreformed and inefficient state-owned enterprises (SOEs), and provide a possible solution based on an efficient use of China’s burgeoning foreign exchange resources.
Topic:
Privatization, Finance, Economy, and State-Owned Enterprises
Political Geography:
China and Asia

4854. Global Imbalances and Financial Reform with Examples from China

Author:
Raghuram G. Rajan
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
I will focus on a familiar issue, the problem of global current account imbalances, and will describe how financial sector reform can help narrow them, using examples from China. The United States is running a current account deficit approaching 6.25 percent of its GDP and over 1.5 percent of world GDP. To help finance it, the United States pulls in 70 percent of all global capital flows. Clearly, such a large deficit is unsustainable in the long run. The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, such as the Japanese asset bubble, the crises in emerging markets in Asia and Latin America, and most recently, the IT bubble. Investment has fallen off sharply since, with only very cautious recovery. This is particularly true of emerging Asia and Japan. The policy response to the slowdown in investment has differed across countries. In the industrial countries, accommodative policies such as expansionary budgets and low interest rates have led to consumption- or credit-fueled growth, particularly in Anglo-Saxon countries. Government savings have fallen, especially in the United States and Japan, and household savings have virtually disappeared in some countries with housing booms. By contrast, the crises were a wake-up call in a number of emerging market countries. Historically lax policies have been tightened, with some countries running primary fiscal surpluses for the first time, and most bringing down inflation through tight monetary policy. With corporations cautious, and governments abandoning the grandiose projects of the past, investment has fallen off. Instead, exports have led growth. Many emerging markets have run current account surpluses for the first time. In emerging Asia, a corollary has been a buildup of international reserves.
Topic:
Financial Crisis, Reform, Finance, Economy, and Deficit
Political Geography:
China, Asia, North America, and United States of America

4855. Renminbi Controversies

Author:
Morris Goldstein
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
No topic in international monetary economics has probably been more debated over the past three years than what should be done about China’s currency regime and about the exchange rate for the renminbi (RMB). In this article, I take up three questions that are at the center of the current debate, namely: (1) Is the RMB undervalued and, if so, by how much? (2) Would an RMB appreciation of 20–25 percent be particularly harmful for China’s economic growth and development, as well as for its domestic financial stability? (3) Was the July 21, 2005, currency reform a large or tiny step forward?1
Topic:
Economics, Economic Growth, Currency, and Financial Stability
Political Geography:
China and Asia

4856. Five Persistent Myths About China's Banking System

Author:
Jonathan Anderson
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Of all the various topics and issues facing observers of the Chinese economy, it is safe to say that none arouses more spirited debate than the role of the financial system, and in particular the state of Chinese banks. Is the mainland on the verge of a financial crisis? Has the recent economic overheating created a new flood of bad loans? Do banks know how to allocate capital, or are they simply quasi-fiscal agencies acting at the mercy of the government? And does the rapidly opening financial system represent a gold mine or a “black hole” for foreign investors? The answers to these questions are not always straightforward, but in our experience the truth lies very much away from the extremes so often presented in the financial press. Chinese banks are by no means “out of the woods,” first and foremost because they remain stateowned institutions, but they are now well advanced from their situation only a decade ago. This means that the economy is protected from the risk of a financial crisis—but, on the other hand, the banking sector is more a sunset industry than an exciting growth sector. There are a number of myths about banks and the financial system in China but the following are the most important and most persistent: (1) China’s cost of capital is far too low; (2) Mainland banks are unreconstructed quasi-fiscal agencies; (3) Bank recapitalization is a sham; (4) Banks are already “out of the woods”; and (5) The Chinese banking system is an exciting growth industry. Let us now examine these five myths.
Topic:
Economics, Financial Crisis, Finance, Economic Growth, and Banking
Political Geography:
China and Asia

4857. Managing Uncertainty: Formulating A U.S. Grand Strategy for China

Author:
Christopher E. Schildt
Publication Date:
05-2006
Content Type:
Journal Article
Journal:
Journal of Public and International Affairs (JPIA)
Institution:
School of Public and International Affairs (SPIA), Princeton University
Abstract:
This paper posits that in the face of uncertainty over China’s rise to power, traditional realist and liberal theories of international relations are impractical for formulating U.S. policy. Instead, this paper outlines a new way of thinking about international order and then uses a game theory model to analyze U.S.-Sino relations in light of this new framework. The model fi nds that a mixed strategy equilibrium exists whereby the United States pursues both competitive and cooperative policies toward China. This U.S. policy of “guarded engagement” could induce Beijing to cooperate but leaves the United States prepared for confl ict if it does not.
Topic:
International Relations, Foreign Policy, Grand Strategy, Game Theory, and Uncertainty
Political Geography:
China and Asia

4858. U.S.-China Relations: The Case for Economic Liberalism

Author:
James A. Dorn
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In its 2005 Report to Congress, the U.S.-China Economic and Security Review Commission—also known as the U.S.-China Commission (USCC)—recommended that China appreciate its currency, the renminbi (RMB), “by at least 25 percent against the U.S. dollar” or face “an immediate, across-the-board tariff on Chinese imports.” The commission argued that such an action could be justified under Article XXI of the World Trade Organization (WTO), “which allows members to take necessary actions to protect their national security.” The key idea behind the commission’s protectionist policy stance is that “China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern” (USCC 2005: 14).
Topic:
Bilateral Relations, Economy, Trade, and Liberalism
Political Geography:
China, Asia, North America, and United States of America

4859. China’s Stock Market: A Marriage of Capitalism and Socialism

Author:
Sonia M. L. Wong
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The rise of China’s stock market during the 1990s was nothing short of breathtaking. For more than 30 years after 1949, China was a centrally planned economy in which virtually all enterprises were state owned or collectively owned. Investments were centrally planned and funded by government fiscal grants as well as by loans from the state-owned monobank system as dictated by the government’s central credit plan. In the late 1980s, as part of enterprise reforms that took place during China’s gradual transition to a market economy, local governments in China started experimenting with selling shares of collectively owned enterprises directly to domestic individuals in order to raise equity capital. Curbed trading of enterprise shares soon began and was quickly followed by over-the-counter (OTC) trading in more organized but still informal exchanges. In 1991, two stock exchanges, one created by the Shanghai municipal government and the other by the Shenzhen municipal government, were launched, with the central government’s formal approval. Between 1992 and 2003, the market raised a total of 796.79 billion yuan of equity capital. At the end of 2003, China’s stock market had 1,287 listed enterprises and more than 70 million investor accounts (CSRC 2004).
Topic:
Economy, Investment, Socialism, State Capitalism, and Stock Markets
Political Geography:
China and Asia

4860. Tokyo's Quandary, Beijing's Moment in the Six-Party Talks: A Regional Multilateral Approach to Resolve the DPRK's Nuclear Problem

Author:
Kuniko Ashizawa
Publication Date:
09-2006
Content Type:
Journal Article
Journal:
Pacific Affairs
Institution:
University of British Columbia
Abstract:
The record of Japan's diplomacy in the Six-Party Talks (SPT), the key multilateral mechanism to address North Korea's unflagging nuclear ambitions, is unpronounced. Tokyo's position in the SPT process has been often viewed as a secondary one, as if it was functioning as Washington's henchman, and at times as unproductive, thanks to its attempts to address the abductions issue in this multilateral setting. This represents an interesting contrast to China's SPT diplomacy, which has seen Beijing play an indispensable role, projecting itself as an honest broker. Further, the contrast between the two countries is intriguing when their general policies toward regional multilateral institutions over the past decade are taken into account. Both countries made a conspicuous shift in their attitudes toward regional multilateral institution-building, from negative and skeptical to positive and active. In the case of the SPT, a new multilateral institution in Asia, Tokyo's activism appeared to be muted, while Beijing positioned itself in a most visible manner. With this backdrop, the article examines Japanese policy making toward the SPT through a specific comparison with the country's general attitude toward regional institution-building and with China's SPT diplomacy. It argues that three aspects of the decision-making context—the nature of foreign policy questions, the composition of actors, and the type of available diplomatic tools—unique to Japan's dealings with the SPT essentially shaped its diplomacy and thus brought about a conspicuous contrast with its general attitude toward regional institution-building and with Beijing's growing regional activism.
Political Geography:
Japan, China, Washington, Beijing, Asia, North Korea, and Tokyo