China flow

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  • Publicado : 28 de abril de 2011
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How do you perceived the International Monetary System in the future?

For the past decades, western economies have been the main players on the International Monetary System. Since 1944 at Breton woods, the US dollar became the official reserve currency giving USA exorbitant privileges for the next decades to influence the global economy with their monetary policy decisions. Nevertheless, thehuge Global imbalances we are witnessing right now are, according to some experts, unsustainable on the near future and economies are already starting to adjust.

Over the past decades, China has maintained a huge current account surplus with US arousingcausing strong complaints accusing Cchina of keeping their currency depreciated to maintain competitiveness causing a ricse of unemployment inthe USA. Over the years, cChina has experienced major capital inflows due to speculations on RMB appreciation causing PBoC to accumulate huge amount of reserves. Although for some people capital inflows can be seen as a positive inflow for a country as they which represent additionalmore financial resourcesng and efficiency in the home country, in the case of Chinafor Chinese case is there areconcernsa focal concern for because of iInflationary pressures. Chinese monetary policy weapon to fight inflation has been sterilization. Recently PBOC increased the reserve requirement ratio to 20.5%, an expensive way to preventcombat inflation for the cCentral bBank because they just sit on the money on their liabilities side of their balance sheet limiting the money to be lent by banks to theprivate sector. This which would boost the economy, pushing the RMB and rising levels of inflation. which is what China is trying to control on the first place.This is what China is trying to control in the first place.
Let’sLet’s keep in mind that Cchina´s has a fix exchange regime that is causing them to accumulate huge amount of reserves. Due to their mercantilist perspectiveperspective, Chinesepeople look at these reserves as “wealth” while for western economies reserves play the role of automatic stabilizers.; Wwhen the imports increase or decrease thanks to their floating rate regime reserves will adjust.

The PBOC is reluctant to let the RMB appreciate. That tha ist the reasons the reason for which why western economies accuse Cchina of playing beggar with their play beggar thyneighbor. Experts argue that these global imbalances are unsustainable on the long run and if the adjustment is not achieved with an RMB appreciationappreciation, it will then happen trough inflation in Cchina and deflation in US.
But why US is not US experiencinge higher levels of inflation thatn ChinaHINA Iif ithe is the one doing all the quantitative easing on the first place? This is thereason whybecause the US is growing below potential. Of course that does not mean that USA could not suffer from uncomfortable inflationary pressures on the future, because as we know the FED is falling behind the inflation curve at keeping their interest to low for too long.

In this matter Tthere is a lot of controversy related to this matter. Is if is it a good moment or not to raise interestrates?. On one hand, we have the example of the ECB who has just raised their interest rates by 50BP, S some may argue it is a bad moment to do it considering all the debt that the European Union is holding right now making it now even more expensive, but on the other European central banks main goal is to fight inflation. Only tTime willould tell.

ThereforeSo, the future international monetarysystem will definitely face some adjustment in the near future. Another theory suggests that ing this adjustment will take placeis if Cchina´s s consumption share of GDP could raises faster than the investment downslope:declines Tthis wouldill result in a reduction in China´s current account surplus. Since thiscurrent account surplus can be expressed as the difference between national saving and...
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