Rapidly 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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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number
232003.
Length: 31 pages Date of creation: Dec 2003 Date of revision: Handle: RePEc:hkm:wpaper:232003
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Find related papers by JEL classification: F15 - International Economics - - Trade - - - Economic Integration F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
MPRA Paper
14000, University Library of Munich, Germany.
[Downloadable!]
Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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