Zhang Monan

Debtor has edge over creditor

By Zhang Monan (China Daily)
Updated: 2010-09-18 08:07

High profit ratio of US capital contrasts sharply with the low return rate of China's holdings of dollar credits

The China-United States economic imbalance usually refers to the imbalance between the two countries in current account, in which China enjoys a huge surplus and the US a large deficit. Such an imbalance also profoundly reflects the uneven distribution of rights and interests between the two powers - China as the world's largest creditor and the US as its biggest debtor.

Sino-US relations have long been a kind of mutually reliant relationship built on an asymmetrical basis. An analysis of both countries' foreign financial assets, liabilities structure and their investment-profit ratio will show that the US, despite being the world's largest debtor, still enjoys a positive investment to return ratio, a ratio that is far higher than China's net assets yield ratio as the world's biggest creditor nation.

From the perspective of international investment efficiency, China is a global creditor with a negative wealth effect. Statistics show that China suffered a negative international investment-return rate for most of the years from 1990 to 2008, with an accumulated deficit of $60.553 billion - a huge loss of the country's national wealth.

A look at China's International Investment Position also shows that its reserve assets accounted for as high as 66.73 percent of the country's foreign assets from 2004 to 2009, 63.56 percentage points higher than that of the US. In its foreign debt, the value of foreign direct investment (FDI) accounted for as high as 59.96 percent during the same period, or 55.21 percentage points higher than that of the US. Such an imbalanced assets and liabilities structure has resulted in a low return ratio in its international investment. It is also an indication of China's inadequate ability to control its foreign economic exchange.

Ironically, being the largest debtor nation has not restrained the mammoth that is the US. Instead, its huge debt has been used as an effective apparatus to maintain and extend Washington's decades-old global financial hegemony.

Experiences indicate that the US has heavily depended on the endless inflow of international capital to its territory for its debt financing to operate the world's largest economy. About one-third of US foreign economic deficit has been offset through its well-developed financial institutions, statistics show. From 1993 to 2005, the US sustained an accumulated $4.4 trillion deficit in its current account, compared with the $2.4 trillion increase in its foreign net assets liabilities of the same period. The other $2 trillion deficit was offset by the robust return of the dollar capital to the US.

For many years, most of US foreign assets have been denominated by foreign currencies, in sharp contrast with its own foreign debts, which are largely dollar-denominated. Under these circumstances, the firmly established dollar standard system has not only helped promote international circulation of US debts, but has also helped Washington increase its national wealth through the monetarization of its debts or devaluation of the dollar.

Because of the dominant position of the US in the international financial market, its currency, the dollar, has been used as the currency in 48 percent of international trade settlements, 61.3 percent of global foreign reserves and 83.6 percent of international financial transactions. The dollar standard system has in essence involved into a kind of monetary policy that helps the US eliminate its bulging foreign debts.

From 2002 to 2006 alone, an accumulated $3.58 trillion worth of US debt evaporated because of the Federal Reserve's increased issuance of the dollar or the decision to devalue the greenback as the world's leading reserve currency.

On the other hand, the US has also profited much from its large amounts of long-term foreign investment. Compared with the average annual 3.5 percent of return ratio that foreign countries holding 10-year US debts can get, the US has gained a much higher return ratio from its overseas investment. By making full use of the dollar's status as the leading international currency and its overwhelming advantages in global financial divisions, Washington has proven to be the largest beneficiary in the accelerated distribution of global wealth.

Compared with the advantage the US enjoys in the global financial scope, China is still not a credit power in the real sense despite its status as the world's largest creditor nation. It is more like a depositor that puts its enormous funds into the bank only to gain a low interest, before borrowing from bank by paying a much higher rate.

Due to the profound changes that global economic and financial structures have experienced over the past two decades, the global economy has entered an era of financial capitalism. These characteristics make it more convenient for the US to capitalize on its well-developed financial market and its dominant status in the global monetary system, to endlessly offer financial products to emerging economies such as China. It is a process in which Washington has profited more than others.

To change US financial and capital hegemony and reverse imbalances in global wealth distribution, China should join international efforts to rebuild the international monetary system and strive to push for the internationalization of its own currency, the yuan. As an emerging economy, China should also try to push forward much-needed reforms of its own financial establishments and beef up its homegrown financial system to convert its "largest global creditor" status into a financial voice to its advantage.

The author is an economics researcher with the State Information Center.

(China Daily 09/18/2010 page5)