China, Asia, and the New World Economy

by Barry Eichengreen (editor), Yung Chul Park (Editor), Charles Wyplosz (Editor)

The rise of Asia, and China specifically, is the single most important force reshaping the world economy at the beginning of the 21st century. From a low of 20 per cent in 1950, Asia's share of global GDP has now risen to 33 per cent and will exceed 40 per cent within a generation if current
forecasts are realized. Asia's growing weight in the world economy is elevating it to a central position in global economic and financial affairs. The potential global impact of this astonishing growth is far reaching, from oil markets and the environment to a reshaping of trade relations in the
current multilateral system dominated by the WTO.

This collection of original essays written by leading economists explores the likely impact of the rapid growth in the East Asian economies, and in particular China, on the world economy in the coming decades and the consequent challenges for the development of trade, macroeconomic, and
environmental policy.

Genres: China, Economics

432 pages, Paperback

First published February 21, 2008

About the author

Barry Eichengreen* is the George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science at the University of California, Berkeley, where he has taught since 1987. He is a Research Associate of the National Bureau of Economic Research (Cambridge, Massachusetts) and Research Fellow of the Centre for Economic Policy Research (London, England). In 1997-98 he was Senior Policy Advisor at the International Monetary Fund. He is a fellow of the American Academy of Arts and Sciences (class of 1997).

Professor Eichengreen is the convener of the Bellagio Group of academics and economic officials and chair of the Academic Advisory Committee of the Peterson Institute of International Economics. He has held Guggenheim and Fulbright Fellowships and has been a fellow of the Center for Advanced Study in the Behavioral Sciences (Palo Alto) and the Institute for Advanced Study (Berlin). He is a regular monthly columnist for Project Syndicate.

His most recent books are Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (January 2011)(shortlisted for the Financial Times and Goldman Sachs Business Book of the Year Award in 2011), Emerging Giants: China and India in the World Economy, co-edited with Poonam Gupta and Ranjiv Kumar (2010), Labor in the Era of Globalization, co-edited with Clair Brown and Michael Reich (2009), Institutions for Regionalism: Enhancing Asia's Economic Cooperation and Integration, coedited with Jong-Wha Lee (2009), and Fostering Monetary & Financial Cooperation in East Asia, co-edited with Duck-Koo Chung (2009). Other books include Globalizing Capital: A History of the International Monetary System, Second Edition (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (updated paperback edition, 2008), Bond Markets in Latin America: On the Verge of a Big Bang?, co-edited with Eduardo Borensztein, Kevin Cowan, and Ugo Panizza (2008), and China, Asia, and the New World Economy, co-edited with Charles Wyplosz and Yung Chul Park (2008).

Professor Eichengreen was awarded the Economic History Association's Jonathan R.T. Hughes Prize for Excellence in Teaching in 2002 and the University of California at Berkeley Social Science Division's Distinguished Teaching Award in 2004. He is the recipient of a doctor honoris causa from the American University in Paris, and the 2010 recipient of the Schumpeter Prize from the International Schumpeter Society. He was named one of Foreign Policy Magazine 's 100 Leading Global Thinkers in 2011. He is Immediate Past President of the Economic History Association (2010-11 academic year).

* This is the biosketch available at his faculty page.

Reviews

[WaiThain]

used for exhibition

Eichengreen, Barry, Charles Wyplosz, and Ying Chul Park. China, Asia, and the New World
Economy. 1st ed. Great Clarendon Street, Oxford: Oxford University Press, 2008. 1-390. Print.
China and the Multilateral Trading System (p. 145-167)
-Since its accession to the WTO in 2001, foreign trade and foreign direct investment have made even more important contributions to Chinese growth. (145)
- Between 2001 and 2005, for example, the dollar value of Chinese exports and imports increased at annual rates of 29.3 and 25.3 percent respectively, and in 2005 58 percent of Chinese exports originated from foreign-owned firms. (145)
- As a result of this performance, China’s share in world imports increased from 3.3 percent in 2001 to 5.9 percent in 2004 and its share in world exports from 3.9 percent in 2001 to 6.5 percent in 2004. (145)
- In 2001 after fourteen years of negotiations, China became a full member of the WTO, assuming obligations that are at level of many developed economies. (146)
-There is a widespread view that the Chinese currency is seriously undervalued and there are strong external political pressures for a substantial appreciation. The verdict of undervaluation is supported by China’s very large current account surplus and its significant accumulation of foreign exchange reserves over the past few years. (164)
- In March 2006, these amounted to $853.7 billion, surpassing the reserves held by Japan and making Chinese holdings the world’s largest. (164)
Is East Asia Safe from Financial Crises? (p. 233 – 245)
-Almost a decade after East Asia underwent its financial crisis, the scars have not healed. Growth is often significantly lower than it used to be, most countries are still accumulation massive stocks of foreign exchange reserves, and discussions continue to build up collective defense mechanism. (The crisis happened in 1997-1998) (233)
- In the end, the crisis has taught us many lessons. First, apparently minor vulnerabilities can turn into a major source of concern and eventually trigger financial crises, Second, financial liberalization does not mix well with rigidly fixed exchange rates; this conclusion as led to the two-corner strategy, according to which the only stable foreign exchange regime are very hard pegs or freely floating rates. Third, even when there exist restrictions to capital mobility, the currency composition of assets and liabilities matters a great deal. Fourth, contagion is a very serious issue, which points to financial market imperfections. Finally, predicting financial crises is a daunting undertaking. (236)
- The crisis revealed that a number of economic and political arrangements, which had been previously seen as key factors in highly successful catch-up phase of the two preceding decades, turned out to be vulnerabilities. The general reason is that East Asia’s strategies of trade and financial integration rested to a significant degree on an alliance between governments, banks, and large corporations. Early on, this alliance worked well. It allowed for the mobilization of resources and provided support to dynamic entrepreneurs. Over time, the growing size of these companies, along with their integration into the world economy, made them more vulnerable to reversals of fortune. Guaranteed state and banking support made matters worse. It made these companies less alert to the risks that they were taking. It also proved insufficient when the tide unexpected reversed; by then, the companies were too big for bail-outs and yet too big to fail. (237)
Chinese Macroeconomic Management: Issues and Prospects (p. 254 -273)
-In 2006 China’s growth rate was 10.7 percent, while inflation was 1.5 percent. This is the fifth year of high growth and low inflation in a row. China’s average annual growth since 1979 is more than 9.6 percent. It is fair to say that China has growth faster for longer than any country in history. As a result, China has already been the fourth largest economy in the world. In terms of the purchasing power parties, China has already been the second largest economy in the world for many years. (254)
-Usually, growth is driven by a high growth rate of fixed asset investment, and high inflation follows growth with a lag of 4-5 quarters. (254)
-To bring inflation under control, the government uses tight monetary and fiscal policy to cool down the economy. As a result, economic growth slows down, leading to higher unemployment and/or deflation. (254)
-Officially, the objective of monetary policy is to maintain the stability of currency values so as to promote economic growth. The stability of currency means both price stability and exchange rate stability. Therefore, there are three explicit objectives for China’s macroeconomic policy: growth (employment), price stability, and exchange rate stability. There is another implicit objective: structural adjustment. (256)
-China’s monetary policy was shaped under the influence of monetarism in the early 1980s. According to monetarist orthodoxy, the authorities should fix the growth of money supply at a rate that is consistent with a non-accelerating rate of inflation. It is understood that the inflation rate will accelerate with a lag after growth has reached its full potential. (257)
-According to historical experience, when the growth rate is above 10 percent, inflation surpasses 10 percent with a four-five quarters’ lag, and when the rate is above 9 percent the inflation rate surpasses 5 percent. (257)
- Fiscal policy has played a significant role in the past eight years in maintaining the growth of China’s economy. Government expenditures were concentrated in building infrastructure, reforming state-owned enterprises, developing the social security system, science and technology, education, agriculture, and development of the Western regions. That has led to rapid increases in tax revenues relative to the increase in interest payments. As a result, China’s fiscal position has improved rather than deteriorated. (265)
-After ten years of expansionary fiscal policy, China has accumulated large debts. The debt has increased from 4.9 billion Yuan in 1981 to more than 3 trillion Yuan in 2005. However, officially, China’s debt/GDP ratio is still less than 20 percent…The government’s ability to repay debts is also much higher than it appears…As long as China can maintain a relatively high growth rate of 7-8 percent and a budget deficit/GDP ratio of less than 3 percent, the debt balance/GDP ratio will converge to a limit of less than 40 percent. (265-266)
-In 2006, China was able to maintain a high growth rate while keeping inflation under control, Investment is strong; exports have maintained strong momentum, and there is no sign of inflationary pressure. (266)
-According to official estimates, in 2005 the growth rate of GDP was 10.2 percent. The contributions to GDP growth made by investment, consumption and net exports were 36.1 percent, 38.1 percent, and 25.8 percent, respectively. (268)
The Chinese Approach to Capital Inflows: Patterns and Possible Explanations (p. 274-311)
-China has in many ways taken the world by storm. In addition to its swiftly rising prominence in the global trading system, where it accounts for over 6 percent of total world trade, it has also become a magnet for foreign direct investment (FDI), overtaking the United States (in 2003) as the number one destination for FDI. (274)
- China’s integration with the global economy began in earnest only after the market-oriented reforms instituted in 1978. (274)
-…when FDI inflows surged dramatically on account of the selective opening of China’s capital account as well as the rapid trade expansion that, in conjunction with China’s large labor pool, created opportunities for foreign investors. These inflows have remained strong ever since, even during the Asian crisis of the late 1990s. (275)
- An interesting aspect of these inflows is that, contrary to some popular perceptions, they come mainly from other advanced Asian countries that have net trade surpluses with China, rather than from the United States and Europe, which constitute China’s main export markets. (275)
- Over the past decade, China has accounted for about one-third of gross FDI flows to all emerging markets and about 60 percent of these flows to Asian emerging markets. (277)
- China’s share in these flows to emerging markets is substantial. The shares spike upward during the Asian crisis and, more recently, in 2002, when weaknesses in the global economy resulted on a slowdown in flows from industrial counties to most emerging markets other than China. (277-280)
Why Does China Save So Much? (p. 371-392)
-First, China was a socialist economy during the 1949-77 period, but Deng Xiaoping implemented dramatic reforms in 1978, which turned China into a capitalist economy and caused rates of economic growth to skyrocket. (371)
- China has had by far the highest overall saving rate in the world since at least 2000, and her saving rate has increased even further since 2000 – to nearly 50 percent of GDP. Gross capital formation (investment) is also high in China, but because saving exceeds investment, China has been running a net saving surplus, which translates into a current account surplus, and that surplus has been growing sharply – from 1.9 percent of GDP in 2000 to 3.6 percent in 2004 and a remarkable 7.2 percent in 2005 – even though China is investing at a staggering rate of 43-6 percent of GDP and even though China is still relatively poor. (372)