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CHINA'S ROLE IN THE CURRENT GLOBAL ECONOMIC IMBALANCE

Li-Gang Liu

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

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.

Pages: 35 pages
Date: 2005-03
New Economics Papers: this item is included in nep-bec, nep-ifn and nep-tra
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