Special Report: Global Financial Crisis
BEIJING, Jan. 18 -- It is true that world trade suffers from an imbalance, but it appears extremely ridiculous and irresponsible to blame the ongoing financial crisis on that imbalance.
At the Washington summit meeting attended by leaders of the world's 20 largest economies late last year, a definite consensus on the cause of the crisis was reached. It has been accepted worldwide that the ongoing global slump was fueled by the relaxed monetary and financial deficit policies long adopted by the US administration as well as by its lax financial monitoring and market loopholes.
However, as all countries join hands to grapple with the most serious global economic recession in decades, an irresponsible sentiment has emerged from the Western world: that the high saving rate in China and other Asian nations added to Americans overdrawing on consumption. That, it is argued, resulted in the formation of bubbles in its property market. Such remarks by some Western politicians and scholars are an attempt to shift the US' responsibility for the crisis to China and other emerging economies.
It is well known that the US administration has long been clinging to a low individual deposit and a low interest rate policy. As early as in the period of the Great Depression, individual saving ratio in the US was below the zero level and reached the historical low of minus 1.5 percent in 1933. A new round of low individual saving campaign was started in the world's largest economy in 1984 and it hit about 2 percent in 1999. Such a low level has been kept for six years and began to further decline below 1 percent during 2005-07. At the same time, the rate has been cut several times to stimulate economic growth. Such a loose monetary tool did help boost its economy for a period of time, but at the same time it sowed the seeds of the property bubble.
Along with its low individual saving rate and low interest rate policy, the world's sole superpower has also long maintained a trade and budget deficit policy since the early 1980s. The argument that individual and government overspending in the US was caused by China's trade surplus and high saving rate does not hold water, given that they did not concur with the growth of China's foreign reserves and trade surplus. It is known that the East Asian nation's foreign reserves began to skyrocket only after 2003.
The US' budgetary and trade deficits, prompted by lavish lifestyles and the habit of overspending, should also be attributed to its own domestic policies. Since the coming of the information technology miracle, the US administration has turned to a relaxed monetary policy to boost economic growth. Several drastic rate cuts, tax reduction and the adoption of the financial deficit policy have greatly driven individual and public spending. As a result, individual and government deposits have kept declining. These, along with the large-scale import of consumer products and strict limits on hi-tech exports to developing nations, added to declining saving ratio and growing trade deficit.
For emerging Asian nations, holding a higher-level of foreign exchange reserves and domestic saving rates would serve as an effective means to cope with an economic crisis. This was also a dose prescribed by the International Monetary Fund (IMF) after the Asian financial crisis. As a precondition for extending economic aid to crisis-stricken Asian nations, the US-dominated IMF demanded these countries adopt a tightened financial and monetary policy along with raising rates, cutting budgetary deficits and increasing international reserves. Emerging Asian economies, including China, adopted such policies after the 1997 Asian financial crisis to improve their capability to stave off economic risks. There is no reason to blame these countries for doing so.
Also, China's widening trade surplus has been mainly attributed to the international labor division and the change of international trade patterns. It is also a result of the ever-deepening global industrial division, a process dominated mainly by the US-led developed nations in the era of globalization. Over the past two decades, developed countries have basically succeeded in transferring some low value-added manufacturing sectors to developing countries, increasing their own dependence on the latter for manufactured goods. In the accelerated transfer of global manufacturing sectors, China particularly became an ideal destination due to its labor and price advantage. In addition to being home to moving manufacturing industries from economically developed countries, China has also become a destination for manufacturing units transfer from some emerging nations. This tendency has further contributed to the country's expanding trade surplus in recent years.
China's surplus with developed countries is also closely related with the strict barriers imposed by these technologically developed nations. The country's fast-growing economy in the past decades has created a great demand for hi-tech products. As part of the technology blockade, some developed countries, however, have laid down some insurmountable barriers on the export of their hi-tech products to China, adding to their trade deficits with the country.
Thus, it is not difficult to conclude that the main cause of the huge US trade deficit lies in its own economic structure and macroeconomic policies. And its wrong economic polices and improper market monitoring are the primary reason for the current financial crisis. Any attempts to shift the responsibility to other countries reflect the inability to develop the right attitude for seeking solutions. It would also vitiate the atmosphere in the global battle against the crisis.
The author is a director with the People's Bank of China. This is an excerpt from of his article published in People's Daily on Wednesday
(Source: China Daily)