China: A Stabilizing or Deflationary Influence in East Asia? THe Problem of Conflict Virtue
AbstractRapidly growing Chinese exports are middle-tech¡V¡Vand increasingly high-tech¡V¡Vmanufactured goods. China runs a huge and growing bilateral trade surplus with the United States, and the position of Japan has changed radically from being a net exporter to China in the 1980s and most of the 1990s to being a net importer today. China¡¦s smaller East Asian industrial competitors such as Taiwan, Korea, and Singapore face fairly difficult readjustment problems. However, China is a huge importer of primary products and industrial raw materials and runs large import surpluses with the ASEAN group. On the macroeconomic side, China has been a stabilizing influence. While maintaining steady high growth and exchange rate stability at 8.28 yuan per dollar since 1994, it has largely avoided, and thus dampened, the business cycles of its East Asian trading partners. But there are potential clouds on this horizon. Since 1995, China has run moderate multilateral trade surpluses coupled with large inflows of foreign direct investment. The resulting balance of payments surpluses have led to a rapid buildup of liquid dollar claims on foreigners¡V¡Vboth in official exchange reserves and, less obviously, in stocks held privately or in China¡¦s nonstate sectors. This increasing private dollar overhang leads to what we call the syndrome of ¡§conflicted virtue¡¨. If there is no threat that the renminbi will appreciate, private portfolio equilibrium for accumulating and holding both dollar and renminbi assets can be sustained. However, foreigners, particularly Japanese, are upset with China¡¦s ¡§excessive¡¨ mercantile competitiveness. They are urging China¡¦s government to appreciate the renminbi¡V¡Vand show greater future exchange rate flexibility, which could lead to repetitive appreciations. The result would be severe deflation throughout China¡¦s economy and a zero-interest liquidity trap¡V¡Vas in Japan, when forced into repeated appreciations of the yen in the 1980s into the mid 1990s.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 232003.
Length: 31 pages
Date of creation: Dec 2003
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Other versions of this item:
- Schnabl, Gunther, 2003. "China: a stabilizing or deflationary influence in East Asia?The problem of conflicted virtue," TÃ¼binger DiskussionsbeitrÃ¤ge 263, University of Tübingen, School of Business and Economics.
- Ronald McKinnon & Gunther Schnabl, 2003. "China: A Stabilizing or Deflationary Influence in East Asia? The Problem of Conflicted Virtue," Working Papers 03007, Stanford University, Department of Economics.
- F15 - International Economics - - Trade - - - Economic Integration
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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- Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers 112003, Hong Kong Institute for Monetary Research.
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