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China'S Role In The Current Global Economic Imbalance

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  • Li-Gang Liu
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    Abstract

    This paper argues that the triangular trade established among China, the US, and the rest of the East Asia suggests that a unilateral renminbi revaluation will not help reduce the large US-China trade deficit. The paper shows further that China's economic overheating over the last two years had little to do with its "undervalued" currency. In fact, incentives to expand balance sheets, interest rate margin and liberalization, and continued interferences on bank lending by local governments contributed to rapid credit expansion and overinvestment. In light of the unsustainable US current account deficit, China and the rest of the East Asia is likely to experience continued and large capital inflows, which will make further sterilization less effective. China's exit from the current exchange rate regime could thus be coordinated with the currencies of the East Asia region as they together would have to make major adjustments.

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    File URL: http://www.rieti.go.jp/jp/publications/dp/05e010.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 05010.

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    Length: 35 pages
    Date of creation: Mar 2005
    Date of revision:
    Handle: RePEc:eti:dpaper:05010

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    1. Cheung, Yin-Wong & Chinn, Menzie David & Fujii, Eiji, 2003. "The Chinese Economies in Global Context: The Integration Process and Its Determinants," Santa Cruz Department of Economics, Working Paper Series qt26x5h54t, Department of Economics, UC Santa Cruz.
    2. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
    3. Takatoshi Ito & Anne O. Krueger, 2000. "The Role of Foreign Direct Investment in East Asian Economic Development, NBER-EASE Volume 9," NBER Books, National Bureau of Economic Research, Inc, number ito_00-2, October.
    4. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
    5. Michael D. Bordo, 2003. "Exchange Rate Regime Choice in Historical Perspective," NBER Working Papers 9654, National Bureau of Economic Research, Inc.
    6. Shang-Jin Wei, 2000. "Why Does China Attract So Little Foreign Direct Investment?," NBER Chapters, in: The Role of Foreign Direct Investment in East Asian Economic Development, NBER-EASE Volume 9, pages 239-265 National Bureau of Economic Research, Inc.
    7. Guillaume GAULIER & Francoise LEMOINE & Deniz ´┐ŻNAL-KESENCI, 2004. "CHINA's INTEGRATION IN ASIAN PRODUCTION NETWORKS AND ITS IMPLICATIONS," Discussion papers 04033., Research Institute of Economy, Trade and Industry (RIETI).
    8. Mitsuhiro Fukao, 2003. "Capital account liberalisation: the Japanese experience and implications for China," BIS Papers chapters, in: Bank for International Settlements (ed.), China's capital account liberalisation: international perspective, volume 15, pages 35-57 Bank for International Settlements.
    9. Robert C. Feenstra, 1999. "Discrepancies in International Data: An Application to China-Hong Kong Entrepot Trade," American Economic Review, American Economic Association, vol. 89(2), pages 338-343, May.
    10. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    11. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
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