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Greenway International Dr. Joe (Xiaozhou) Cheng Who Could Fix the Messy Global Economy? The global economy has been out of the sound increase track for four years after the outbreak of the financial crisis. China, the second largest economy entity, could have a hard landing in 2012 since the real estate market in China is dramatically cooling down. Even if the unemployment rate of the United States in January brought a piece of good news for markets, however, it is still above 8%, and there are no any other strong evidences that can tell the economy of the United States will have a rosy picture for next two years. The economy in the Euro zone is still suffering the sovereign debt crisis, and the average unemployment rate in the Euro zone is 10.4% in January. In Greece, the core of Euro zone debt crisis, the unemployment rate is over 20%. It is not only the number, and means the economy is shrinking. One year ago, Canada and Australia, these developed countries with the rich natural resources, hiked up the overnight interest rates at least two times; the emerging markets countries, such as China, Brazil, Korea, and India, also picked up overnight interest rates for fighting inflation pressure. This kind of instance of the monetary policy seems to indicate that the global economy had overcome the financial crisis at beginning of the 2011. But now, the central banks across the world, have to keep overnight interest rates frozen at a low level, even China’s central bank had to lower down the bank reserve rates in order to avoid the economy hard landing. The change of monetary policy direction has already showed that the economies have not got rid of the recession pain from the financial crisis. Many economist and politicians have acknowledged that the economic recession in the United States and the Euro Zone is the longest one since the great depression of 1929. The global economy has experienced many financial crises for last two decades. The significant ones are the 1994 Mexico financial crisis, 1997 Asian financial crisis and 1998 Russia debt default. When the crises happened, the world economy looked like to be the last day of the world; but the global economy got back into increase track in a short time. Why does it take a long time for the world economy recovery from this financial economy? The main reason is that the global economy is over imbalanced now. It is the imbalanced global economy that gives rise to the outbreak of the financial crisis and impedes the economic recovery. The global economy has been over imbalanced for ten years. It is an outcome of the economic globalization. With the development of the economic globalization, the global market is integrated, and the capital funds flow into the emerging markets countries from the developed countries. Most of multinational corporations in the developed countries have moved their manufacture base into the emerging markets countries. The mother corporations just run services departments—products designation, management of marketing and supplying chain, and the finance. The exports of the emerging markets countries increase dramatically, in the mean time, the imports of the developed countries increase fast too. The economies of the emerging markets countries are in the status of www.greenway2china.com 1 [email protected] Greenway International Dr. Joe (Xiaozhou) Cheng surplus; and that of developed countries run in deficits. The imbalanced global economy appears to happen between the emerging markets countries and the developed countries. The significant proxies in the imbalanced global economy are China and the United States. The economy of the United States, with GDP US$ 15 trillion, the biggest economic entity in the world, has been running with over 8% of GDP “twin deficit” for ten years. Many economists from all over the world have warned the United States for this economic status, but nobody can stop it. The federal government debt, fiscal deficit, and foreign trade deficit, are still built up. The United States is the largest debtor in the world. Now, look at China, the second largest economic entity in the world, the economy has experienced the capital-account and the current-account huge surplus since late 1990s. The trade surplus of China during 2004 to 2006 is around US$ 20 billion annually. Based on the huge surplus, the foreign exchange reserve in China is built up to US$ 3 trillion from less than 1 trillion for within four years. China is the largest creditor in the world. After the outbreak of the financial crisis, the outstanding economists and politicians have perceived this issue and suggested that this issue have to be resolved. But the main countries involved this issue has not made any resolutions for this issue. Every country knew that implementing the fiscal and the monetary policy is the significant tools for coping with the financial crisis, but did a less job for fixing international economic problems. America continually expanded the federal debt limitation, and implemented the “buy America policy”. China kept the RMB foreign exchange rate still and expanded it exports. The global economy has been still messy for four years after the outbreak of the financial crisis. Who could fix it? And who is able to fix it? Hundred years ago, the economic globalization was processing and running smoothly based the golden system, for which the Great Britain sterling was the significant anchor. After the Second World War, the growth of world economy was based on the US dollar system, which was named the Breton Woods System. After experiencing the two world wars, the European economy was impaired, and the Great Britain became a debtor country from a creditor; on the contrary, the United States become a creditor in the world economy. The America had strong abilities to implant the American version plan (the White’s plan) into the world economic system although the Great Britain’s plan was made by the influential economist Keynes. Today, the United State is a debtor, and China is a creditor. So by this logic and experience, could China fix the problem? In the other words, could the new international financial system is cemented on the China economy? In the eve of G20 London Summit 2009, Zhou Xiaochuan, the governor of the People’s Bank of China, suggested creating the world currency, “Bancor” (borrowed the conception from the Keynes’s plans), substitute for the greenback as the world reserve currency. Although he didn’t mention the RMB Yuan will be a world currency the www.greenway2china.com 2 [email protected] Greenway International Dr. Joe (Xiaozhou) Cheng Chinese is expecting that the RMB Yuan will be a world reserve currency, as like US dollar, Japanese Yen, Euro. If only judging from the values of the GDP and foreign exchange reserve, China has the abilities to fix the messy global economy; but observing the economic system China is short of abilities to put the global economy in order. The capital-account is still controlled by the government and the RMB Yuan cannot be freely convertible into the other currencies. The Chinese characteristic markets economic system is still doubted by the European Union. Although the currency swap agreements have been signed between China and many other countries, the RBM Yuan cannot be broadly accepted in dealing with the transactions of international trade. Maybe after twenty years later, the RMB Yuan will be a world reserve currency, like US dollar, but not now. Could Japan, the third largest economic entity, fix the problem? Japan is still suffering from the outburst of the real estate markets bubble in 1990s. The government of Japan is facing the high ratio of the debt to the GDP, which is over 200%, and the overvalued the Japanese Yen. Germany, the fourth largest economic entity in the world, has to cope with stabilizing Euro and debt crisis in the Euro zone. It has no time to think about the international financial system. Mekerl, the Chancellor of Germany, visited China just after the Chinese New Year long holiday, and expected China can give a hand to Germany for fixing the current debt crisis in Euro zone. The United States couldn’t fix it; China, could not; Japan, could not; Germany, could not. Is it really a last day of the world in 2012? No, it not. The world needs the cooperation. The new international economic system needs the cooperation from all over the world. Every main player in the world economic arena has to keep its own economy in a balance status whatever through revaluing its own currency or implementing new fiscal policy such as austerity plans. The main players have to give up something for the emerging of the new world economic system. (成小洲 Xiaozhou Joe Cheng, 2012-01-30) www.greenway2china.com 3 [email protected]