The Evolving Role of China in the Global Economy

The Evolving Role of China in the Global Economy

Yin-Wong Cheung
Jakob de Haan
Copyright Date: 2013
Published by: MIT Press
Pages: 472
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  • Book Info
    The Evolving Role of China in the Global Economy
    Book Description:

    China is now the world's second largest economy and may soon overtake the United States as the world's largest. Despite its adoption of some free-market principles, China considers itself a "socialist-market economy," suggesting that the government still plays a major role in the country's economic development. This book offers a systematic analysis of four factors in China's rapid economic growth: exchange rate policy, savings and investment, monetary policy and capital controls, and foreign direct investment (FDI). Contributors offer fresh perspectives on the undervaluation of the renminbi, the dollar peg, and China's macroeconomic relationships with the rest of the world. They review factors shaping China's saving dynamics and analyze the growth of the private sector despite limited access to external finance. They examine the monetary policy independence of the People's Bank of China, offshore markets for China's currency, and the effectiveness of China's capital controls. Finally, they consider Chinese FDI in terms of China's growing demand for energy and raw materials, exploring the factors that drive China's FDI in the conventional oil-producing countries and in Africa.

    eISBN: 978-0-262-30586-0
    Subjects: Economics, History

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Contributors
    (pp. vii-viii)
  4. Series Foreword
    (pp. ix-x)

    This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research network....

  5. Preface
    (pp. xi-xiv)
    Yin-Wong Cheung and Jakob de Haan
  6. 1 Introduction
    (pp. 1-14)
    Yin-Wong Cheung and Jakob de Haan

    China has recently overtaken Japan as the world’s second largest economy. According to the Conference Board, China doubled its share of global output during the past ten years (from 8 percent in 2000 to 16 percent in 2010) and may soon top the United States as the world’s largest economy.¹ Between 1979 (when economic reforms began) and 2008, China’s real gross domestic product (GDP) grew at an average annual rate of nearly 10 percent. China’s economy grew 14-fold in real terms, while real per capita GDP increased over 11-fold (Morrison, 2009).² Despite these extraordinarily rapid growth rates, China still has...

  7. I China’s Exchange Rate Policy

    • 2 United States, China, and the Rebalancing Debate: Misalignment, Elasticities, and the Saving-Investment Balance
      (pp. 17-52)
      Menzie David Chinn

      China’s global trade has loomed large in policy debates along a number of dimensions. This has been more pronounced ever since China’s external balances have shifted from balance to surplus (including the current account and trade account), and foreign exchange reserves have increased. China’s trade balance and reserve accumulation are depicted in figure 2.1. The increasing integration into world trade is illustrated in figure 2.2; both exports and imports have nearly returned to pre-recession levels. Figure 2.3 illustrates the fact that the Chinese trade surplus has been increasing even as the yuan (measured both against the USD and against a...

    • 3 The Role of the Chinese Dollar Peg for Macroeconomic Stability in China and the World Economy
      (pp. 53-82)
      Gunther Schnabl

      The financial and economic crisis from 2007 to 2009 has brought a new dimension to the US–Chinese exchange rate dispute. Whereas the crisis caused China to return to the pre-2005 tight dollar peg to stabilize industrial production and employment, the Federal Reserve aggressively cut interest rates to prevent a meltdown in financial markets. As the recovery in the United States continues to lag behind China, the re-emergence of carry trades and the re-acceleration of Chinese reserve accumulation have added new fuel to the highly controversial exchange rate dispute. For instance, Krugman (2010) welcomed the Chinese New Year by calling...

    • 4 Permanent and Transitory Macroeconomic Relationships between China and the Developed World
      (pp. 83-106)
      Yueqing Jia and Tara M. Sinclair

      Although research on business cycles and economic growth has traditionally focused on developed countries, there is increasing interest in the economic fluctuations of developing countries. In particular, policy makers and researchers have focused on the growing importance of China, the largest developing country, within the global macroeconomic environment. Recent research by Jia and Sinclair (2009) explored the connection between the macroeconomic fluctuations of China and the United States. This chapter extends that analysis to examine the relationships between the real GDP of China and that of developed countries more generally.

      In terms of the discussion about China’s modern role in...

    • 5 China’s External Position: Simulations with a Global Macroeconomic Model
      (pp. 107-144)
      Lukas Vogel

      The Chinese economy has transformed and developed remarkably during the past twenty years. Real output has grown at annualized two-digit rates. Per capita income has risen from 5 to 20 percent of EU-15 levels. At the same time China has accumulated large external surpluses and has become the world’s largest international creditor.

      The chapter focuses on the link between China’s economic transition and integration, on the one side, and its position as large net capital exporter, on the other side. Contrary to the Chinese experience, the textbook open-economy model would suggest economic catch-up to coincide with net capital imports and...

  8. II Chinese Savings and Investment

    • 6 How Much Do We Know about China’s High Saving Rate?
      (pp. 147-180)
      Guonan Ma and Wang Yi

      China saves more than half of its GDP and its marginal propensity to save approached 60 percent during the 2000s. Such high saving rate has attracted much attention (Zhou 2009; ADB 2009; IMF 2009), as it may have important implications both for China’s own internal balance and for the external balance (Bernanke 2005).

      This chapter has three aims: to highlight the stylized facts of Chinese saving, to review the debate over factors shaping the saving dynamics, and to explore its medium-term outlook and policy implications. Our review combines an international comparison of gross national saving and a breakdown of this...

    • 7 Why Is China’s Saving Rate So High? A Comparative Study of Cross-Country Panel Data
      (pp. 181-230)
      Juann H. Hung and Rong Qian

      China’s extraordinarily high national saving rate has been at the center of much concern and analysis in recent years. In March 2005 Chairman Ben Bernanke of the Board of Governors of the Federal Reserve System proposed that the saving glut (i.e., more saving than needed for domestic investment) in parts of the world—notably China and some oil-exporting countries—has contributed to the large US current account deficit and global imbalance. Since then, concerns about the mounting global imbalance—and more recently, the conviction in some quarters that the large saving glut was a main culprit of the 2008 to...

    • 8 If You Try, You’ll Get By: Chinese Private Firms’ Efficiency Gains from Overcoming Financial Constraints
      (pp. 231-262)
      Galina Hale and Cheryl Long

      The importance of finances in economic development has long been postulated and empirically tested in the economic literature. As early as 1911 Schumpeter linked availability of financial services to firms’ capacity for technological innovation and thus a country’s economic development. Much later, country-level analyses by King and Levine (1993) provided evidence that multiple indicators of financial development are not only positively correlated with the present levels of multiple economic indicators but also their future values. Using industry-level data for a large number of countries, Rajan and Zingales (1998) showed that industries with higher external finance requirements tend to grow faster...

  9. III China’s Monetary Policy and Capital Controls

    • 9 Chinese Monetary Policy and the Dollar Peg
      (pp. 265-300)
      J. James Reade and Ulrich Volz

      China’s reinstitution of its dollar peg in July 2008 in the wake of the global financial crisis has stirred a heated discussion about China’s alleged currency manipulation and beggar-thy-neighbor policy. Proponents of a reform of China’s currency regime have argued that the dollar peg not only has negative effects on China’s trading partners, it also has detrimental effects on the Chinese economy since it impedes an independent monetary policy by the People’s Bank of China (PBC), China’s central bank (e.g., Roberts and Tyers 2003; Eichengreen 2004; Prasad et al. 2005; Goldstein and Lardy 2006, 2009).

      The theoretical implications of a...

    • 10 Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues
      (pp. 301-338)
      Dong He and Robert N. McCauley

      The global financial crisis of 2007 to 2009 highlighted a potential benefit of the internationalization of emerging market currencies. As banks scrambled for liquidity, US dollar funding markets and foreign exchange swap markets seized up in late 2008 (Baba and Packer 2009; Hui et al. 2009). The resulting “dollar shortage” (McGuire and von Peter 2009a, b) threatened to stifle international trade. In response, more than one emerging market central bank found itself in the unaccustomed business of providing dollar funding to domestic banks and financing exports. This experience has highlighted the danger of relying excessively on one reserve currency in...

    • 11 Crisis, Capital Controls, and Covered Interest Parity: Evidence from China in Transformation
      (pp. 339-372)
      Jinzhao Chen

      Covered interest parity (CIP) condition states that there will be no advantage to borrowing or lending in one currency rather than in another. In the absence of impediments to capital movement, the market arbitragers will equalize the rate of return for assets of similar risk characteristics denominated in different currency to maintain the CIP. In this chapter I study the renminbi (RMB) covered interest differential that is closely related to capital controls in China.

      During the East Asia financial crisis of 1997, China’s relatively closed capital accounts were considered by some commentators to be an important element in its ability...

  10. IV China’s FDI and Quest for Resources

    • 12 China’s Outward Direct Investment and Its Oil Quest
      (pp. 375-418)
      Xingwang Qian

      The People’s Republic of China (henceforth, China) has experienced a miracle of economic development since it “opened its door” in 1978. Three decades of astonishing growth have propelled China to become the second largest economy in the world. However, behind such a miracle, there are numerous challenges and issues that China has to confront and resolve. Such issues include the shortage of domestic natural resources, a widening income inequality, the global payments imbalance, and the valuation of the Chinese currency, renminbi, among others. How China resolves those issues has profound implications for both China and the global economic outlook.


    • 13 China’s Investments in Africa
      (pp. 419-444)
      Yin-Wong Cheung, Jakob de Haan, Xingwang Qian and Shu Yu

      China’s fast-growing economic ties with Africa have attracted considerable attention. China’s trade (exports plus imports) with Africa increased steadily, albeit at a slow pace, in the 1990s, but surged from $9.5 billion in 2000, to $36.3 billion in 2005, and to $79.8 billion in 2009. Likewise China has become one of the major capital providers for countries in Africa (UNCTAD 2007 ). According to the 2009China Commerce Yearbook, China’s outward direct investment (ODI) in Africa relative to its total ODI increased from 2.6 percent in 2003 to 9.8 percent in 2008. Africa has in fact become the third largest...

  11. Index
    (pp. 445-458)