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US Hegemony, China, and the US Current Account Deficit
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US Hegemony, China, and the US Current Account Deficit
Carmel Davis8/25/06
9
supports demand for products of the excess investment of its economy by loaning money to theUS, allowing higher US consumption than would be possible without external support.
In addition to its compositional imbalance, the Chinese economy has significant institutional andstructural weaknesses. Institutionally, rights to intellectual and real property are weak, there isextensive corruption,
19
industry is fragmented and barriers between provinces impede movement
of goods,
20
and bankruptcy is rare so resources are not redistributed to more productive uses. One
of the most important is the interrelationship between capital allocation, weak SOEs, and thefragile banking system. Capital markets are underdeveloped and much financing is providedeither by bank loans or foreign direct investment. Banks loaned about $362 billion in 2003 whilemoney raised through equity and bond markets was about $21 billion. Total credit, virtually all ofwhich is in the form of bank loans, was about 145 percent of GDP at the end of 2003, muchhigher than other countries, while total capitalization of China’s two stock markets was thirty-three percent of GDP.
21
Much of that capital is allocated on the basis of political preference to
weak SOEs.
22
Many SOEs have been privatized and the number of direct employees has fallen
dramatically but those that remain play a central role in the economy. Most are unproductive,unprofitable, and unable to repay the loans to the state-owned commercial banks that keep themafloat. The scale of the financial problem of SOEs is visible in China’s fragile banking system,which has a massive nonperforming loan (NPL) problem and is technically insolvent. Countingonly the overdue portion of loans as nonperforming, official estimates of NPLs were almost $290billion in 2003, or about twenty-one percent of GDP.
23
Unofficial estimates are higher.
24
A large
percentage of NPLs are keeping SOEs afloat and so providing employment and so avoidingstresses on the banking system.
25
Not issuing new loans to SOEs and refusing to roll over old
ones might force SOEs into bankruptcy followed soon thereafter by bank failures prevented onlyby large-scale government recapitalization.
19
China ranked 78 out of 158 countries in the Transparency International Corruption Perceptions Index
2005,
www.transparency.org/policy_research/surveys_indices/cpi/2005
(August 24, 2006). See David
Barboza, “Wave of Corruption Tarnishes China’s Extraordinary Growth,” New York Times, March 22,2005, C1 focuses on corruption in the financial sector.
20
Sandra Poncet, “A Fragmented China: Measure and Determinants of Chinese Domestic Market
Integration,” July 21, 2004, at
team.univ-paris1.fr/teamperso/sponcet/indexenglish.htm
March 26, 2005.
According to OECD 2002, China has 200 separate automakers, most of which complete only a fewthousand units per year, and 8000 independent cement companies while the US has 110, Russia has 51Braizil has 58, and India has 106. OECD, 2002, p. 15.
21
Data for stock market capitalization as a percent of GDP are from
devdata.worldbank.org/wdi2006/contents/Section5.htm
(August 24, 2006). See also Steven Barnett,
“Banking Sector Developments,” Prasad, ed., China’s Growth and Integration, p. 43.
22
SOEs are firms in which some state entity, which may be the central government, a province, or a
municipality, controls the rights of revenue, control, and transfer of a firm. The number of SOEs and theiremployees has been declining. The number of industrial state-owned and state-holding enterprises, forexample, declined from almost sixty-five thousand in 1998 to some forty-one thousand in 2002. NationalBureau of Statistics, China Yearbook 2003, p. 461. Employment by SOEs declined from sixty-sevenmillion in 1980 to some thirty-five million in 2002, and from over sixty-three percent of urban employmentin 1980 to some fourteen percent in 2002. Ray Brooks, p. 51. SOEs were central to the lives of theirworkers, providing housing, education, healthcare as well as salary and pensions.
23
Stephen Barnett, p. 46.
24
See, for example, “A reheated economy,” Jan. 25, 2005,
www.economist.com
. “China’s Banks: Root
and branch,” The Economist, Nov 4, 2004,
www.economist.com
(February 8, 2005), “Bolstering China’s
Banks,” Business Week, December 13, 2004.
25
See Lawrence Dwight, “The Role of Non-Performing Loans in China: A Public Finance Approach,”
September 20, 2004,
emlab.berkeley.edu/econ/grad/d.cvs/dwight.pdf
(February 10, 2005)
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US Hegemony, China, and the US Current Account Deficit
Carmel Davis
8/25/06
9
supports demand for products of the excess investment of its economy by loaning money to the
US, allowing higher US consumption than would be possible without external support.
In addition to its compositional imbalance, the Chinese economy has significant institutional and
structural weaknesses. Institutionally, rights to intellectual and real property are weak, there is
extensive corruption,
19
industry is fragmented and barriers between provinces impede movement
of goods,
20
and bankruptcy is rare so resources are not redistributed to more productive uses. One
of the most important is the interrelationship between capital allocation, weak SOEs, and the
fragile banking system. Capital markets are underdeveloped and much financing is provided
either by bank loans or foreign direct investment. Banks loaned about $362 billion in 2003 while
money raised through equity and bond markets was about $21 billion. Total credit, virtually all of
which is in the form of bank loans, was about 145 percent of GDP at the end of 2003, much
higher than other countries, while total capitalization of China’s two stock markets was thirty-
three percent of GDP.
21
Much of that capital is allocated on the basis of political preference to
weak SOEs.
22
Many SOEs have been privatized and the number of direct employees has fallen
dramatically but those that remain play a central role in the economy. Most are unproductive,
unprofitable, and unable to repay the loans to the state-owned commercial banks that keep them
afloat. The scale of the financial problem of SOEs is visible in China’s fragile banking system,
which has a massive nonperforming loan (NPL) problem and is technically insolvent. Counting
only the overdue portion of loans as nonperforming, official estimates of NPLs were almost $290
billion in 2003, or about twenty-one percent of GDP.
23
Unofficial estimates are higher.
24
A large
percentage of NPLs are keeping SOEs afloat and so providing employment and so avoiding
stresses on the banking system.
25
Not issuing new loans to SOEs and refusing to roll over old
ones might force SOEs into bankruptcy followed soon thereafter by bank failures prevented only
by large-scale government recapitalization.
19
China ranked 78 out of 158 countries in the Transparency International Corruption Perceptions Index
2005,
www.transparency.org/policy_research/surveys_indices/cpi/2005
(August 24, 2006). See David
Barboza, “Wave of Corruption Tarnishes China’s Extraordinary Growth,” New York Times, March 22,
2005, C1 focuses on corruption in the financial sector.
20
Sandra Poncet, “A Fragmented China: Measure and Determinants of Chinese Domestic Market
Integration,” July 21, 2004, at
team.univ-paris1.fr/teamperso/sponcet/indexenglish.htm
March 26, 2005.
According to OECD 2002, China has 200 separate automakers, most of which complete only a few
thousand units per year, and 8000 independent cement companies while the US has 110, Russia has 51
Braizil has 58, and India has 106. OECD, 2002, p. 15.
21
Data for stock market capitalization as a percent of GDP are from
devdata.worldbank.org/wdi2006/contents/Section5.htm
(August 24, 2006). See also Steven Barnett,
“Banking Sector Developments,” Prasad, ed., China’s Growth and Integration, p. 43.
22
SOEs are firms in which some state entity, which may be the central government, a province, or a
municipality, controls the rights of revenue, control, and transfer of a firm. The number of SOEs and their
employees has been declining. The number of industrial state-owned and state-holding enterprises, for
example, declined from almost sixty-five thousand in 1998 to some forty-one thousand in 2002. National
Bureau of Statistics, China Yearbook 2003, p. 461. Employment by SOEs declined from sixty-seven
million in 1980 to some thirty-five million in 2002, and from over sixty-three percent of urban employment
in 1980 to some fourteen percent in 2002. Ray Brooks, p. 51. SOEs were central to the lives of their
workers, providing housing, education, healthcare as well as salary and pensions.
23
Stephen Barnett, p. 46.
24
See, for example, “A reheated economy,” Jan. 25, 2005,
www.economist.com
. “China’s Banks: Root
and branch,” The Economist, Nov 4, 2004,
www.economist.com
(February 8, 2005), “Bolstering China’s
Banks,” Business Week, December 13, 2004.
25
See Lawrence Dwight, “The Role of Non-Performing Loans in China: A Public Finance Approach,”
September 20, 2004,
emlab.berkeley.edu/econ/grad/d.cvs/dwight.pdf
(February 10, 2005)
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