Download Who could fix the messy global economy

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
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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
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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)
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