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 Research Institute of Finance of the State Council's Development Research Center.

From an economic perspective, the rise of every major creditor nation was attributable to sustained and rapid growth, Ba said. 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.

Advancing reforms

The fact China, a developing country, is forced to provide low-interest loans to the United States and other developed countries shows its status as a creditor nation is exaggerated, Ba said. The root cause of this dilemma is in the defective international monetary regime. The financial crisis has awakened the international community to the need to reform the current international monetary system in a creative way and to make international reserve currencies stable in value, orderly in supply and adjustable in total amount. Only in this way can global economic and financial stability be ensured.

Ba said he thought countries should advance the reform of the international monetary regime, promote the diversity of international currencies and let different currencies compete with each other. When fundamental imbalances occur in international payments, countries issuing major currencies should undertake the responsibility of tackling the imbalances, along with other countries.

At the same time, the international community should step up reforms in the International Monetary Fund (IMF). More professionals from emerging markets and developing countries should be allowed to assume executive posts in international financial institutions to enhance the voice of developing countries.

Countries should also reform the current international payments balancing system. As the issuing country of a major international currency, the United States should be held responsible for balancing international payments. It should adopt a fiscal policy that balances consumption and savings while boosting hi-tech exports and increasing domestic savings.

China should take an active part in the reforms of the international monetary regime and the IMF as well, Ba said. It should make itself better represented, heard and informed about in the international financial system. At the same time, it should try to make the yuan an international currency.

In the short term, China should participate in Group of 20 efforts to promote global recovery and international cooperation under the dollar-dominated international monetary regime while trying to improve the regime's specific arrangements. This approach would not only be conducive to the stability of the international financial order, but also serve China's national interests.