Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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China, new financial superpower …

by Brad Setser
August 3, 2009

One of the biggest economic and political stories of this decade has been China’s emergence as the world’s biggest creditor country. At least in a ‘flow” sense. China’s current account surplus is now the world’s largest – and its government easily tops a “reserve and sovereign wealth fund” growth league table. The growth in China’s foreign assets at the peak of the oil boom – back when oil was well above $100 a barrel – topped the growth in the foreign assets of all the oil-exporting governments. Things have tamed down a bit – but China still is adding more to its reserves than anyone else.

Yet China is in a lot of ways an unusual creditor, for three reasons:

One, China is still a very poor country. It isn’t obvious why it makes sense for China to be financing other countries’ development rather than its own. That I suspect is part of the reason why China’s government seems so concerned about the risk of losses on its foreign assets.

Two, almost all outflows from China come from China’s government. Private investors generally have wanted to move money into China at China’s current exchange rate. The large role of the state in managing China’s capital outflows differentiates China from many leading creditor countries, and especially the US and the UK. Of course, the US government organized large loans to help Europe reconstruct in the 1940s and early 1950s, and thus the US government played a key role recycling the United States current account surplus during this period. But later in the 1950s and in the 1960s, the capital outflows that offset the United States current account surplus (and reserve-related inflows) largely came from private US individuals and firms. And back in the nineteenth century, private British investors were the main financiers of places like Argentina, Australia and the United States. We now live in a market-based global financial system where the biggest single actor is a state.

Three, unlike many past creditors, China doesn’t lend to the world in its own currency. It rather lends in the currencies of the “borrowing” countries – whether the US dollar, the euro, the British pound or the Australian dollar. That too is a change from historical norms. Many creditor countries have wanted debtors to borrow in the currency of the creditor country. To be sure, that didn’t always work out: it makes outright default more likely (ask those who lent to Latin American countries back in the twentieth century … ). But it did offer creditors a measure of protection against depreciation of the debtor’s currency.

This system was basically stable for the past few years – though not with out its tensions. Now though there are growing voices calling for change.

China seems to be inching toward the position that those countries borrowing its funds should start to take on some of the risks that China’s government now assumes. The basic idea is simple: China keeps its lending, but gets a better renminbi returns while taking less (currency) risk. That, though, would be a fundamental change in the current international financial system. And it isn’t quite clear how China can change its external profile so long as it wants above all to maintain a peg to the dollar at a level that requires sustained intervention – and a controlled capital account.

Some of China’s borrowers, by contrast, are arguing that maybe China shouldn’t be quite so keen to lend the world quite so much …

Makes for an interesting world.


  • Posted by Timer

    Can’t remember where I read this so I can’t give credit.

    Amassing 5% to 6% of gobal currency reserves occured in the 1920’s US pre depression era. In Japan just before the lost decade. In China as they are having serious problems with of all things, inflated real estate prices.

    The world needs balance and it looks like 6% of global currency reserves is a tipping point.

  • Posted by Rider I

    We now live in a market-based global financial system where the biggest single actor is a state. I would like to further your statement of the market based global financial system. Glad to see you are moving up in the world. Good to go. These words will probable fall on shallow ears as you have left this site. However, still though, this needs to be said.
    The thought that we live in a market based global financial system intrigues me. I have come to find that we truly have allowed the Communist Style Economics that we so defended against during the Cold War to take a huge hold. It has become inherent that your exact statement is true. However, I would have to differ with the world market financing. Currently, it is the Communist Party financing that keeps us dependent on the one single party state and not a properly regulated global market. This state is the Communist party. As such these statements will be made in a vacuum un-present the norms of the power of the free markets that are still left.
    The Communist Party has been allowed to get away with huge International Economic cartel abuses. This includes everything from vertical resources acquisition, to the shipping lanes, back to the production, packaging and even the distribution, then leading right into the financing department. They have also been able to pad their economy by using their SOE cartels to look after those who best serve the Political Party. They have inherently been able to sneak around and cloak their ever expanding State Owned Enterprises; which, in the cold war would have been unheard of without proper regulations. But, today we allow them to compete unfairly and we just keep borrowing money to keep paying them our jobs, debts, and allowing them to gain Political and Military advantages through the use of their SOE’s acquiring free market shares and infrastructures like ports and resources.
    The idea that it is a world market is starting to be lost. As the American board that was supposed to specifically watch over the Communist Economic Cartels has been lost and spread out to a security review board that has too few workers and not enough funding. We have seen a huge loss in the ability to defend against the Communist Cartel Economics. This has also been seen recently as the WTO Working commission on Interacting and Competition of International Anti-Trust laws in specific Cartel activities has become inactive. At a time when the last part of the Cartel Strategy is becoming more than prevalent on why we do not like Cartel activities. The allowance of the cartel activities really has turned it into a Communist bizar. Allowing Communist Cartels to purchase the very business they crashed because of their unfair competition. Also places like Brazil through huge parties that Capitalism caused the world crash, the Leader of Venezuela just stole 11 American oil rigs even though they had to the money to pay them under the Chinese Communist watchful eye, and the Chinese Communist went around behind Americas back saying it was their fault. Yet, no one had the where with all to say no China no it was your cartel activities that caused this and you need to stop, tell Venezuela to pay our people and stop trying to buy business with your SOE Communist Economic Cartel Political and Military national interests
    It was the Communist Economic SOE cartels fault for creating the biggest unfair competition since the threat of the Soviet Union. We have seen countries so dependent on the Communist Cartels for resources and manufacturing that it has become ridiculous to hear politicians keep saying we allow the loss of jobs to the Communist so we can create and keep high technology jobs. But, however, we also are losing the high technological manufacturing jobs too. As a matter of fact our very Secretary of Energy spent about 50% more on financing foreign SOE’s in China to further their technological advancement of green tech manufacturing than he did on his own countries job market. It has become so blatantly abusive that there is no one to report it to, the US and other free world countries did not even stand up to the Communist. Nor do I really think anyone even knows that they are abusing their SOE Cartels.
    As such, I write to create an interest I do not see, as we have lost the world free market and gained a Communist Cartel Market. Look at the world, find the countries with the biggest Communist Cartels and you find the state’s that are doing the best. So your comment is true yet at the same time not true; Global market no, state financers yes. Therefore, Globally underdeveloped countries, countries with individuals and corporations avoid of government national interest cannot compete with SOE cartel abuses. Leaving a single country dominance and not a world fair and peaceful marketplace. We have allowed the Communist Cartels to try and overtake the American freedom dollar and place in a selfish government that uses its SOE’s at such a mass level as to destroy foreign markets. They do this so (it, their cartels) can then go and acquire the markets it has destroyed for political and military purposes, whether they know it or not. I would think if this was a global market someone would have Stopped them and regulated them before they were allowed to get this far. The Communist Cartel has 3 out of the top ten world business competing with companies with no government interest. It is my prediction that within the next 10-20 years all the top business will be country owned business causing wars for resource and market shares if we don’t properly regulate the Abusers of SOE cartels and bring back the world market of peace and harmony of business to business instead of country v country as inherently SOE Cartels lead to.
    That is why the Communist party has been able to get away with what they have been able to get away with. The Communist party has been using a centralized national and military political interest to compete against countries with individuals and corporations avoid of government ownership. Inherently we have seen millions of jobs lost and not replaced 100,000 of employers had to shut down and could not re-open and yet, we still are allowing the Communist Cartels to be abusive and blame us for their abuse.

    Please see my website, if you ever read this. It is a currently under construction to become the best Anti-Economic Warfare blog ever and the bright light for the biggest Communist Cartel Abuses since the Soviet Union.
    Think you can ride with the Rider I?

  • Posted by Rider I

    Cite for the Secretary of Energy spending 50% more on Foreign creation of High tech green jobs than he did for his own counties interest of creation of jobs and technology here at home. Makes me sad when things cannot be mitigaged. I am the Rider and you are in my scope. I want justice, legally and properly.

  • Posted by bubbles

    i would also have to argue, that the Fed/Treasury is in a way really testing china’s statements on “dollar stability”.