INTRODUCTION
China’s trade balance in 1978 was a deficit of US$1.1 billion. However, the country’s government entered a period of economic reforms in that same year and the country enjoyed an economic turnaround. In the first half of 2009, China gained a balance of trade surplus of $400 billion and the country’s foreign reserve increased significantly from $2 billion in 1978 to $2.4 trillion in 2009.
Many economists identify that China’s economic boom is attributed to trade with the United States of America. And China’s accession to the World Trade Organization has played a significant role in the accumulation of foreign reserves. This is because the United States is obviously importing a lot of products from China. Additionally, China’s south-south cooperation has led to access to numerous markets around the world. However, the Chinese households are not spending the same volume of money on foreign imports. This suggests that China is quite conservative in its spending on imports and rather, they are aggressively producing and exporting to different parts of the world.
The fundamental aim of this paper is to ascertain why China has accumulated so much foreign reserves after they joined the World Trade Organization.
THESIS STATEMENT
In order to explain the reason for positive balance of payments in China and the accumulation of huge foreign reserves after China’s accession to the WTO, this paper asserts that China’s Communist government has put in place measures that prevent households from engaging in consumerism and they have set up reserves through decree as a means to improve the lives of their people. In other words, the Chinese government has injected money into the economy to promote productivity which is supported by a high rate of export. This has allowed China to grow its trade portfolio and also acquire huge foreign reserves.
CHINA AND THE WORLD TRADE ORGANIZATION
In 2011, the Chinese Premier, Wen Jiabao stated that WTO membership opened up China to the outside world. China submitted a membership request to join the GATT in 1986. The country acceded in November 1995 and within that period China streamlined many of its policies to meet the requirements for WTO members. China eventually joined the WTO in 2001.
After being a WTO member for a decade, China became the largest exporter of merchandize and the second largest economy after it remained a member of the WTO. This has come as part of the country’s policies and strict rules towards alleviating poverty and building a strong economy for the country.
Joseph Stiglitz identified that China’s growth is steeped in industrial policies and government reform priorities. This is because the government’s policy and plan that it made before entering the WTO involved increasing prosperity and reducing poverty through industrialization. In the Communist tradition of China, the country sought to use the WTO membership to boost its industries and enhance its foreign earning capability by promoting industrialization and proactively engaging in policies that will further and advance the development of people in the nation.
The government of China therefore had a primary obligation of ensuring that their WTO membership benefited the nation and its masses in the best way possible. Thus, they sought to promote export and enhance their competitive advantage which was steeped in industrialization and the exploitation of the nation’s cheap labor.
On the household level, most households did not have the propensity to spend because of the poor and less developed financial sector. This is because there are severe borrowing constraints and the financial sector is still in the period of development.
However, on the international market though, Chinese goods are relatively cheaper than American goods. Hence, the Americans buy a lot of Chinese goods. In the reverse side, the Chinese households and consumers cannot afford as many American goods. Therefore, the Chinese have developed a natural tendency not to buy foreign goods and products. They just consume local products and focus on exporting more. Therefore, the country has sought to focus on improving the lifestyles of their people and also, enhancing the economy through various projects and programs that enable the country to maintain total employment and also get a better footing in international trade.
In relation to household’s it can be said that the culture and consumption system of China is such that most people seek to save money. This is because there is no access to borrowing and other financial arrangements that can enable an individual to spend beyond his or her means as the case might be in other nations of the developed world. This is because in relation to a nation like the United States where people can get bonds and loans to finance their needs and expectations, the ordinary Chinese household does not get access to such monies. For instance, in the situation where it became clear that China will get a housing issue, the country placed a ban on people’s acquisition of a second home. This helped to prevent people from spending beyond their means to create a glut in the economy as the case was with the United States during the financial crises of 2007 – 2009.
Hence, the average Chinese household has to find ways and means of saving in order to acquire things that they might need. This enables them to spend within their means and also spend money locally on locally produced items that enables the country to thrive without having to rely on imports from the United States and other nations around the world.
Therefore, the growth of the Chinese economy which caused individual households to get higher income led to the increase in the rate of savings. The figure below from Wen (2011) indicates how savings have increased in relation to increases in the earnings of China through the WTO
The figure above indicates that household savings have increased in relation to the increases in household income. This can be attributed to the growth in the earning capacity of people and the fact that people have no options for financing things they need but through savings. Hence, there is a general trend towards a more responsible spending pattern which prevents the over-reliance on imports from foreign countries like the United States.
CHINA’S FOREIGN RESERVES
In analyzing this, it can be identified that China was somewhat closed to the rest of the world in the 1970s. The country’s struggle to gain acceptance in the global order as a Communist nation and other issues made China a bit of an isolated nation. However, the restructuring and streamlining in order to join the World Trade Organization enabled China to build strong policies and processes to enter the global order as a credible trade partner. The World Trade Organization streamlines the trading processes and systems that China is involved in. This enables China to gain access to international markets, particularly the United States. Thus, China is able to trade more through a multilateral process rather than a bilateral system which was very much limited. Thus, their final membership to the WTO in 2001 enabled China to gain access to new markets they were not accustomed to.
In return to this opportunity, China built its export capability and reneged on its import and consumption systems. Therefore, the nation sought to promote high volumes of trade whilst it made huge moneys from the United States. Therefore, the surplus enables China to keep a huge reserve that is substantial.
A large share of China’s reserves is invested in the US and this is in the form of private and public securities. This includes long term treasury debts, long-term US agency debts, long-term US corporate debts, long-term US equities and short-term debts. As of June 2012, China held $1.6 trillion in US security and was the second largest holder of US securities after Japan. In terms of the US Treasury, China had the largest volume of securities valued at $1.3 trillion.
The United States has a low savings rate. And the US economy is based on consumerism and this is funded by foreign capital inflows. This is because the average American consumer has access to loans and other forms of financial benefits that enables him to get money to fund things he needs. However, the United States has a very secured and a highly protected system of protecting funds and investments. Hence, the United States is a popular destination for nations to save their money and invest.
SOURCES OF CHINA’S FOREIGN RESERVES
Economists believe that capital items’ surplus have been the reason behind China’s foreign exchange reserves. This is because China exports more and their exports earn more than their imports. Thus, the extra money they get in the US currency enables them to get enough money to invest directly in other ventures around the world.
China is also a popular destination for a lot foreign direct investment drives. Hence, they are able to get a lot of dollar injections into the economy. And in a situation where these businesses yield money from their operations in China, China exports them and gets foreign exchange which adds up to their foreign reserves. As stated above, China provides foreign debts to nations around the world, particularly the United States. They also have transnational acquisitions through their south-south cooperation which is seeing China’s influence grow significantly in Africa and other developing countries around the world. This brings them foreign exchange and national resources to continue producing for exports to other parts of the world.
The Rate Analysis model indicates that exchange reserves must exceed 3-month imports of foreign exchange demands. In other words, the model dictates that a nation ought to have three moths excess of reserves to meet its import needs. Based on this model, China can be seen as a nation that has exchange resources that always exceeds their import requirements and needs. Hence, the Chinese nation always has enough money to meet their demands of foreign exchange and hence, they hold surpluses which are injected into their foreign reserves.
Thus, China held reserves of $3.3 trillion at the end of 2012 and this was the highest foreign exchange reserve in the world, exceeding Japan which holds $1 trillion in reserves. This is governed by the State Administration of Foreign Exchange and two-thirds are held in US Dollars whilst a quarter is held in Euros.
Growth in China’s Foreign Reserves
China’s foreign reserves have grown steadily since 2002 when they joined the WTO. This shows that there is empirical evidence that China has been saving a lot from its trade with foreign nations. And this has made China much more prone to saving more money and building up its reserves.
WTO, CHINA AND US DOLLAR RESERVES
The World Trade Organization arrangements enabled China to trade more with the United States than with the European Union. This is because although the European Union has a large market, it has numerous arrangements within its boundaries that aids protectionism and makes it less favorable to trade with the European Union.
Additionally, China typically trades with the Member States of the European Union as single and independent nations. Hence, they make fairly little than they do in relation to the United States. And since China exports goods that aid consumerism and consumerism is rife in the United States, China trades more with the United States and WTO arrangements enable this trade to be facilitated without issues. Although the EU is a WTO member, it has numerous internal rules and regulations that hinder trade with a nation like China. Hence, the United States is the best destination for Chinese exports.
China has trade surpluses with the United States. And hence, they often get foreign exchange in US dollars. Therefore, due to the fact that the WTO promotes this process, China continues to expand its trade with the United States and earns US Dollars. Hence, it will be more convenient and appropriate for China to save its assets in Dollars, rather than Euros. This is because exchanging from Dollars to Euros will create shortfalls and this might not be favorable for China as a nation.
China also knows that the United States is a fairly stable country and the United States is not likely to default in its sovereign debts, China continues to see the United States as a major investment destination. Also, with signs that the United States economy is recovering, it is apparent that China will continue to invest in the US rather than the Eurozone which has had crises in recent times.
THE CHINESE CURRENCY AND WTO ARRANGEMENTS
The Chinese Renminbi (RMB) or Yuan is not openly traded on the world market. The Chinese government therefore controls the worth of the Yuan through its policies and systems. This is because China aims at ensuring full employment and maintaining a better economy. This is done by maintaining a more stable currency and also hedging prices against conditions on the world market.
The Chinese government therefore restricts foreign influence in its trade through the WTO through various ways and means including inflationary pressures and volatility from short-term capital flows. Therefore China uses the Yuan in trade settlements and reduces surplus in trade and maintains capital reserves. These reserves are flexed and used from time to time to ensure that stability is maintained in the economy and the state.
The government of China maintains controls because of the fear that large private capital outflows will cause the currency to lose its stability. Due to this, China’s Yuan is not fixed through the forces of demand and supply as in the case of many other nations that have floating exchanges on their currencies. Rather, they focus on using their reserves to hedge their currency which is protected in many ways and manners.
The Chinese Yuan and Market Disparities
CONCLUSION
China’s membership to the WTO has given it access to large and prosperous markets like the United States. This has enabled China to gain a lot of money through exports. Meanwhile, China has cut down on its imports through various forms of sacrifices.
The research indicates that China’s government has put in place measures that have gone a long way to ensure that the Chinese economy benefits significantly from its WTO membership. And this include the fact that the country maintains a huge reserve which is locked up in foreign currency and foreign reserves kept around the world, particularly in the United States.
The Chinese government also has numerous economic arrangements and processes that protect it from major issues and problems like providing access to households. There are checks and balances that ensure that the country maintains a fairly equitable distribution of income through continuous employment. This is supported by the fact that China’s currency is not influenced by the forces of demand and supply, but by the intervention and rules of the Chinese government, which protects Chinese jobs and enhances the economy and ensures an even distribution of wealth in such a large country.
In spite of this, other issues like the lack of a strong financial sector and the sacrifices of the Chinese people have contributed to the success China has attained in the past ten years after they joined the WTO. This is because the absence of a good financial sector has enabled the Chinese people to cut down on consumption and this has in turn led to a system of savings which corresponds to the increase in income in the economy.
In summary, China’s government has played a leading and far-reaching role in the protection of the Chinese economy and in building the reserves for the Chinese people. However, the government’s effort has been supported by the absence of a good financial sector to feed into the consumerism of the nation as the case may be with the United States. Also, the saving culture of the Chinese people has helped them to achieve good results.
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