China's Wealth Woes
- From: cnw <cnw@xxxxxxx>
- Date: Thu, 31 Aug 2006 10:25:32 +0800
China's Wealth Woes
With its dollar hoard rising at $17 billion a month and about to pass the $1
trillion mark, Beijing is finding out that it is possible to have too much
money.
Beijing's growing dollar hoard represents the most dangerous imbalance in
today's global economy. The United States is both importing heavily from China
and borrowing heavily from the country to finance those purchases, pushing the
dollar down and putting the two economic superpowers on a collision course.
Washington politicians demand that Beijing raise the value of the yuan against
the dollar, and Chinese officials have hinted that if pushed too hard they might
shift their near-trillion-dollar reserve out of U.S. Treasury bonds, which could
trigger a U.S. and global recession. The main thing preventing this
confrontation is the fact that both sides have too much to lose. Former U.S.
Treasury secretary Lawrence Summers once called this "the balance of financial
terror." What has gone widely unremarked is that, increasingly, this balance is
threatening China as much as the United States.
The United States has been worrying for the past 25 years about a mounting trade
deficit and the threat it poses to America's financial pre-eminence. But China
now views its surplus with growing alarm, too. Its dollar mountain reflects huge
demand for Chinese goods and the Chinese currency needed to buy those goods. In
mid-2005, Chinese officials, under intense pressure, did allow the renminbi to
rise slightly, by just over 2 percent, but they fear—with some reason—that to go
further could undermine their export competitiveness and lead to bankruptcies.
Speculators, however, are betting that China will have no choice. The global
market assumption that the renminbi is destined to rise is now "the key problem"
for China's economy, warned the head of the National Bureau of Statistics, Qiu
Xiaohua, last week. "It is fair to say that China is actually fighting a game
against worldwide speculative capital ... If not handled properly, this will
damage the national interest and endanger economic security."
In an economy that, for all its might, is still in the developing stage, it is
no small trick to absorb $17 billion a month without destabilizing consequences.
The cash is leaching into the economy, fueling growth of 11.3 percent in the
second quarter, the fastest rate since 1994, threatening a meltdown. And every
solution begets new problems: China has tried command economics, like simply
ordering banks to grant fewer loans or publicly denouncing provincial officials
who spend too recklessly, but that undermines its efforts to reform the banking
sector using the market. It has tried raising interest rates, which can restrain
growth but also attracts more dollars—from investors seeking returns, not import
buyers—and weakens domestic demand. "They're in a trap," says Ronald McKinnon, a
Stanford University economist, in reference to China's surging exports and
undervalued currency. "And there isn't an easy way out."
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