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61. Back to the Future: Understanding China’s Return to Africa and its Implications for U.S. Policy

Author:
Greg Pollock
Publication Date:
05-2007
Content Type:
Working Paper
Institution:
School of Public and International Affairs (SPIA), Princeton University
Abstract:
Since the mid-1970s, China (PRC) has experienced a period of unprecedented economic growth. However, the Chinese Communist Party’s hold on power is now predicated upon maintaining their country’s development trajectory, which requires increasing amounts of natural resources, particularly fossil fuels. To secure access to these raw materials, China has begun to deepen its engagement in parts of the world where Washington has enjoyed a near monopoly on influence since the end of the Cold War. Nowhere is this truer than in Africa, where China has pursued an array of new relationships, some of which directly challenge U.S. interests. This article reviews China’s historical relationship with Africa, accounts for its new investments on the continent, and assesses what the implications of China’s renewed interest in Africa are for U.S. policy.
Topic:
Foreign Policy, Natural Resources, Economic Growth, and Strategic Interests
Political Geography:
Africa, China, Asia, and United States of America

62. 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

63. Renminbi Controversies

Author:
Morris Goldstein
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
No topic in international monetary economics has probably been more debated over the past three years than what should be done about China’s currency regime and about the exchange rate for the renminbi (RMB). In this article, I take up three questions that are at the center of the current debate, namely: (1) Is the RMB undervalued and, if so, by how much? (2) Would an RMB appreciation of 20–25 percent be particularly harmful for China’s economic growth and development, as well as for its domestic financial stability? (3) Was the July 21, 2005, currency reform a large or tiny step forward?1
Topic:
Economics, Economic Growth, Currency, and Financial Stability
Political Geography:
China and Asia

64. Five Persistent Myths About China's Banking System

Author:
Jonathan Anderson
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Of all the various topics and issues facing observers of the Chinese economy, it is safe to say that none arouses more spirited debate than the role of the financial system, and in particular the state of Chinese banks. Is the mainland on the verge of a financial crisis? Has the recent economic overheating created a new flood of bad loans? Do banks know how to allocate capital, or are they simply quasi-fiscal agencies acting at the mercy of the government? And does the rapidly opening financial system represent a gold mine or a “black hole” for foreign investors? The answers to these questions are not always straightforward, but in our experience the truth lies very much away from the extremes so often presented in the financial press. Chinese banks are by no means “out of the woods,” first and foremost because they remain stateowned institutions, but they are now well advanced from their situation only a decade ago. This means that the economy is protected from the risk of a financial crisis—but, on the other hand, the banking sector is more a sunset industry than an exciting growth sector. There are a number of myths about banks and the financial system in China but the following are the most important and most persistent: (1) China’s cost of capital is far too low; (2) Mainland banks are unreconstructed quasi-fiscal agencies; (3) Bank recapitalization is a sham; (4) Banks are already “out of the woods”; and (5) The Chinese banking system is an exciting growth industry. Let us now examine these five myths.
Topic:
Economics, Financial Crisis, Finance, Economic Growth, and Banking
Political Geography:
China and Asia