Time to accommodate China to benefit all
- By Zhang Jun
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E-mail China Daily, June 15, 2015
So far, it seems that there is not enough. China remains subject to US monetary policy. If the Fed raises interest rates, China must follow suit to keep capital from flowing out despite the negative impact of higher interest rates on domestic growth. Given the US dollar's dominance in international transactions, Chinese companies investing abroad also face risks associated with exchange rate fluctuations.
China has faced major challenges within the existing global system as it tries to carve out a role befitting its economic might. That may explain why, with its "Belt and Road Initiative" and the establishment of the Asian Infrastructure Investment Bank, China is increasingly attempting to recast the world order - in particular, the monetary and trading systems - on its own terms.
The AIIB has proved appealing to even major powers like France, Germany and the United Kingdom, reflecting a growing awareness of the US-dominated order's diminishing returns. From China's perspective, sustained domestic economic growth seems unlikely within the existing global system - a challenge that Japan and the other East Asian economies did not encounter during their economic rise. Indeed, the only country that has encountered it is the US, when it replaced the UK as the world's dominant economic power before World War II. Fortunately, that precedent is one of accommodation and peaceful transition.
China does need to further reform its financial sector in order to eliminate distortions in resource allocation and stem the economy's slowdown. But Chinese leaders' refusal to pursue export-boosting currency depreciation, even in the face of decelerating growth, suggests they are willing to make the needed sacrifices to secure the renminbi's international role and, with it, long-term economic growth and prosperity.
Whether or not the renminbi is added to the SDR basket in October, a gradual transformation of the global system to accommodate China seems all but inevitable.
The author is a professor of economics at and director of China Center for Economic Studies, Fudan University, Shanghai.
Project Syndicate
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