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311. U.S.-China Relations: The Case for Economic Liberalism

Author:
James A. Dorn
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In its 2005 Report to Congress, the U.S.-China Economic and Security Review Commission—also known as the U.S.-China Commission (USCC)—recommended that China appreciate its currency, the renminbi (RMB), “by at least 25 percent against the U.S. dollar” or face “an immediate, across-the-board tariff on Chinese imports.” The commission argued that such an action could be justified under Article XXI of the World Trade Organization (WTO), “which allows members to take necessary actions to protect their national security.” The key idea behind the commission’s protectionist policy stance is that “China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern” (USCC 2005: 14).
Topic:
Bilateral Relations, Economy, Trade, and Liberalism
Political Geography:
China, Asia, North America, and United States of America

312. China’s Stock Market: A Marriage of Capitalism and Socialism

Author:
Sonia M. L. Wong
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The rise of China’s stock market during the 1990s was nothing short of breathtaking. For more than 30 years after 1949, China was a centrally planned economy in which virtually all enterprises were state owned or collectively owned. Investments were centrally planned and funded by government fiscal grants as well as by loans from the state-owned monobank system as dictated by the government’s central credit plan. In the late 1980s, as part of enterprise reforms that took place during China’s gradual transition to a market economy, local governments in China started experimenting with selling shares of collectively owned enterprises directly to domestic individuals in order to raise equity capital. Curbed trading of enterprise shares soon began and was quickly followed by over-the-counter (OTC) trading in more organized but still informal exchanges. In 1991, two stock exchanges, one created by the Shanghai municipal government and the other by the Shenzhen municipal government, were launched, with the central government’s formal approval. Between 1992 and 2003, the market raised a total of 796.79 billion yuan of equity capital. At the end of 2003, China’s stock market had 1,287 listed enterprises and more than 70 million investor accounts (CSRC 2004).
Topic:
Economy, Investment, Socialism, State Capitalism, and Stock Markets
Political Geography:
China and Asia

313. Does China Save and Invest Too Much?

Author:
John H. Makin
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
China’s current saving and investment levels are extraordinary— both in terms of its own history, but also by comparison with the current and historical experience of high-saving countries like Japan. The International Monetary Fund’s 2005 World Economic Outlook places China’s gross saving at 50 percent of GDP with gross capital formation, not far behind, at 45 percent of GDP (IMF 2005: 96–97). High levels of saving and investment are usually seen as a good thing. For a developing economy, such as China, a high level of domestic saving and investment means that residents are forgoing current consumption in order to add to the capital stock, thereby increasing growth and labor productivity. For a developed economy like the United States, while absolute levels of saving and investment may not match those in developing economies, a high level of saving and investment would mean that residents are financing most of the increase in the capital stock and are thereby positioning themselves to benefit from future returns earned by the enlarged capital stock. The reality for the United States over the past half-decade—a sharp rise in imports of foreign savings—means that returns from growth in the capital stock are increasingly earmarked for payment to foreign investors. Despite the satisfaction with which most commentators view its high levels of saving and investment, particularly since 2002, China has displayed increasing signs of overinvestment. As used here, the term overinvestment refers to a capital stock either too large or too poorly allocated to generate positive returns at the margin. Misallocated capital and excess capacity in the domestic sector implies a rapid increase in nonperforming loans, which are largely held by China’s state banks. Excess capacity in the tradable goods sector implies a tendency to undervalue the exchange rate in order to maintain the growth of demand for exportables.
Topic:
Economy, Economic Growth, Investment, Currency, and Savings
Political Geography:
China and Asia

314. Do Financing Biases Matter for the Chinese Economy?

Author:
Yasheng Huang
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is widely acknowledged that China’s financial system is deeply troubled. Its banks have very high nonperforming loan ratios and its stock market has lost 50 percent of its value since 2001 amidst a GDP growth rate averaging some 9 percent a year. Those facts about the accounting aspects of China’s financial system are becoming better known in the West. However, what has not been sufficiently highlighted is the precise effect of China’s dysfunctional financial system and its broader pattern of allocating resources—in favor of the state sector at the expense of the private sector—on the Chinese economy and society. Probably the only reason economists and business analysts have found it hard to reconcile the accounting aspects of China’s financial system with the performance aspects of the Chinese economy is that China’s GDP growth has been so impressive. Some experts (e.g., Rawski 2001,Young 2003) have argued that China’s economic performance has not been as impressive as the official statistics indicate. Their work in this area delves into rather specialized and arcane areas of Chinese methods of compiling and reporting data. While this work is analytically important and does resolve some of the puzzles of China’s rapid growth, it is very technical and difficult for nonspecialists to understand. Thus, it is unlikely to grab readers’ attention away from newspaper headlines touting the rise of China and the huge trade surpluses that country has accumulated.
Topic:
Economics, Finance, Economy, Banking, and Bias
Political Geography:
China and Asia

315. A Proposal to Privatize Chinese Enterprises and End Financial Repression

Author:
Deepak Lal
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
China’s remarkable economic performance during the last two decades has rightly been hailed as an economic miracle. In this article, I briefly summarize the sources of the miracle, outline the serious problems China still faces because of the continuing financial repression necessitated by its unreformed and inefficient state-owned enterprises (SOEs), and provide a possible solution based on an efficient use of China’s burgeoning foreign exchange resources.
Topic:
Privatization, Finance, Economy, and State-Owned Enterprises
Political Geography:
China and Asia

316. Global Imbalances and Financial Reform with Examples from China

Author:
Raghuram G. Rajan
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
I will focus on a familiar issue, the problem of global current account imbalances, and will describe how financial sector reform can help narrow them, using examples from China. The United States is running a current account deficit approaching 6.25 percent of its GDP and over 1.5 percent of world GDP. To help finance it, the United States pulls in 70 percent of all global capital flows. Clearly, such a large deficit is unsustainable in the long run. The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, such as the Japanese asset bubble, the crises in emerging markets in Asia and Latin America, and most recently, the IT bubble. Investment has fallen off sharply since, with only very cautious recovery. This is particularly true of emerging Asia and Japan. The policy response to the slowdown in investment has differed across countries. In the industrial countries, accommodative policies such as expansionary budgets and low interest rates have led to consumption- or credit-fueled growth, particularly in Anglo-Saxon countries. Government savings have fallen, especially in the United States and Japan, and household savings have virtually disappeared in some countries with housing booms. By contrast, the crises were a wake-up call in a number of emerging market countries. Historically lax policies have been tightened, with some countries running primary fiscal surpluses for the first time, and most bringing down inflation through tight monetary policy. With corporations cautious, and governments abandoning the grandiose projects of the past, investment has fallen off. Instead, exports have led growth. Many emerging markets have run current account surpluses for the first time. In emerging Asia, a corollary has been a buildup of international reserves.
Topic:
Financial Crisis, Reform, Finance, Economy, and Deficit
Political Geography:
China, Asia, North America, and United States of America

317. A Half-Century of Development

Author:
Richard N. Cooper
Publication Date:
03-2005
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Development as a global policy objective dates from the 1940s. Relative to expectations then, the world economy performed outstandingly well during the second half of the 20th century. Worldwide growth in average per capita income exceeded two percent a year (historically unprecedented), many poor countries became rich, infant mortality declined, diets improved, longevity increased, diseases were contained if not vanquished. Poverty on the World Bank definition of $1 a day (in 1985$) declined dramatically, and the number of persons in poverty was halved despite a more than doubling of the world population. Variations occurred over time and space, with rapid growth being concentrated in Europe and Japan early in the period, then moving to east Asia, southeast Asia, and south Asia. Growth in the 1950s and especially the 1960s exceeded that in later decades. Examples of high growth could be found in every continent, but on average sub-Saharan Africa fared much less well than other regions. Declines in national per capita income were rare, and concentrated in Africa. Civil disorder was a common but not the universal cause of low growth. Median world income gained relative to the well-off, but both spurted ahead of the poorest. World exports grew more rapidly than output, often leading the way. Many countries gradually shifted their exports from primary products to labor-intensive manufactured goods, and as development proceeded to more sophisticated manufactures and services. The fraction of the labor force devoted to agriculture declined significantly. One country after another achieved social stability, created the right incentives for effort and risk-taking, and engaged constructively with the world economy, which facilitated economic growth. Those that lagged failed to meet one or more of these conditions. Civil and political liberties also spread during this period, although less certainly and less securely. On the whole, it was a good half century for mankind. The substantial poverty and misery that still exists should not lead to neglect or even denial of these achievements.
Topic:
Development, Inequality, Economy, and Economic Growth
Political Geography:
Africa, Japan, Europe, and Asia