China's role in world monetary system positive

Guo Shuqing

Today, most people believe that China can play an important role in global financing restructuring, but why and how can China do it? It really needs more discussion.

I. The crux of the current global imbalance

Many people think the recent financial crisis basically resulted from the global economic imbalance. But what does that imbalance mean? Does it refer to the trade surplus and deficit? Or does it refer to the gap in current accounts? On the surface the answer is yes, but in a deeper sense, no. Why?

First, in a globalized world economy, it is very natural that some countries have a surplus and some have deficit. In general, it is a perfect balance. It’s the well-developed division of labor.

Second, a country with a trade surplus is not necessarily the most competitive country. In many cases, it is the opposite. We can divide the trade surplus countries into four groups. Oil exporters (mainly the Middle East countries) belong to the first group. Then, there are the newly industrialized countries, such as countries in East Asia, including China, because they export a lot of manufactured goods.

The third group is Japan and Germany, the industrialized countries that mainly concentrate on manufacturing. These countries are not very advanced countries because they are not very competitive in terms of service industries and other new industries. The last group includes Switzerland, the Netherlands, Sweden and German-speaking countries. They have very advanced service industries and high surpluses. These four groups are very different. Therefore, a surplus does not necessarily mean competitiveness in all cases.

Third, more importantly, a current account deficit country is not necessarily in shortage of money. On the contrary, the largest deficit country has suffered many years from too much capital. The United States is a typical case in which the country has very high level of deficit in current accounts that once accounted for 6 percent or 7 percent of its GDP and now 3.3 percent. It does not lack capital, but rather it suffers from the oversupply of capital.

Therefore, the present world economy has several peculiar features:

(1) There are two groups, savings providers and money spenders.

(2) Large creditors are less competitive, and the largest debtors are most competitive. The United States and the United Kingdom are typical examples of the latter; Japan, Germany and China are creditors but are not so competitive in high value-added service industries as debtors like the United States and the United Kingdom.

(3) Borrowers are always in a superior position — even in the current internally caused financial crisis — because in the end the countries with surpluses will have to send all the money back to the international markets that is dominated by the U.S. dollar and euro. In the past years, these currencies have undergone some inflation. For example, in the past 25 years, the U.S. dollar experience inflation of about 40 percent. And we also see a bubble in all property and capital markets.

So the crux of the imbalance is that only a minority of the most advanced countries enjoy extremely oversupplied financial resources. At the same time, the overwhelming majority of developing countries suffer a shortage of capital. I mean most developing countries are in lack of capital, while some most advanced countries enjoy an oversupply.

The minority countries possess knowledge, innovation, flourishing service industries and hard currency that enable them to achieve supremacy. It is rooted in the modern economy, the post-industrial economy or the post-capitalism one. The production mode in general has changed and we’ve entered a new era. Globally speaking, an economy characterized by reliance on the manufacture of goods has been transformed into an economy based on knowledge, ideas and services. Manufacturing is done in China, Japan and other trade surplus countries, but research, design, innovation and creative services are all done by other countries.

Therefore, this capital balance or imbalance presents a new phenomenon. No force can change it now, and, to some extent, there is no need to change it, because it results from division of labor. The only problem is that the United States and a few most advanced countries consume too much, or to be precise, waste too much. Then we are trapped in a financial crisis, an energy crisis as well as climate change and environmental damages.