He Xin: The Specific and Fantastic Economic and
Trade Relations between China and the United States
[Note: This essay can explain the real economic base of “new model of great powers’ relations between China and the United States” and why China and the United States cannot do without each other. However, it also can be seen that those fantasts, who believe China will surpass the United States and become the most powerful country in the world according to the so called GDP figures, nearly know nothing about the reality of this world.]
Please have a look at the following data on commerce and trade:
After acceding to WTO and becoming a leading exporter of consumer goods in the world in 1990s, China has turned the United States into its largest export market.
According to official data released by the US Commerce Department, in 2014, the United States imported 466.66 billion dollars of goods from China, accounting for about one fifth (accurately, it is 19.9%) of total import of the United States. China was the largest supplier of goods imported by the United States.
Moreover, the worth of medium and long term US Treasuries purchased by China was in the range of 300 to 400 billion dollars in 2014.
The above figures mean that: in 2014, the United States paid for most goods (80%-90%) it purchased from China with receipts for loans or IOUs.
In fact, such pattern of China-US economic and trade relations has existed for many years. Its basic operational mode is:
——The United States purchases goods from China and pays merchants in dollars.
——As China’s exchange control system is controlled by the State Administration of Foreign Exchange, dollars enter into the Bank of China. The bank pays payments for goods to merchants in RMB.
——After gathering the dollars earned, the State Administration of Foreign Exchange purchases US Treasuries through authorized agencies (such as China Investment Corporation, China International Capital Corporation limited, etc.). China obtains receipts for loans (that is, IOUs) from the United States, while dollars flow back to the United States.
——That is to say, the United States actually takes away lots of goods from China utilizing IOUs (US Treasuries) every year.
Therefore, although the Federal Reserve always issues vast amounts of dollars in recent years (such as Q3, Q4 and maintaining long-term low interest rate policy of dollars, etc.), as what the United States paid for Chinese goods are IOUs, the inflation rate always stays very low in the United States.
What China obtains from the United States are IOUs of dollar debts. A small part of such IOUs can be converted into dollars and buy international goods. Most of such IOUs are virtualized as a concept of long-term debts. However, China can gain some interests from US Treasuries every year (the rate of return is about 2%-3%. The earning was about 10 billion dollars in 2014).
Seemingly, both China and the United States are in its proper place and both sides are satisfied. But, it is actually a highly asymmetric economic and financial relation.
Now, China is the largest creditor of the United States. But in fact, it is very hard for China to call in all money lent. If China dumps a large number of US Treasuries, a dollar crisis would arise, as well as a very serious international financial crisis.
The United States greatly benefits from China-US trade. Every year, most Chinese goods the United States obtained are actually equivalent to China’s gifts. Therefore, China is the largest economic tributary of the United States in the world. While the United States is heavily indebted and issues vast amounts of dollars, the reason why it can keep a very low inflation rate is that it can utilize dollar debts (IOUs) to purchase goods. In a certain sense, the rise of China's economy and its huge export to the United States has supported the longest economic boom of the United States in the recent twenty years.
Two reasons contribute to the long-term existence of such specific and asymmetric economics and trade relations. One is the unique foreign exchange system of China. The other one is the special monopoly position of dollar, which is the only universal currency in the world.
But on the other hand, after grasping a huge amount of dollar assets, utilizing dollar’s special monopoly position in the world, China is also benefited. As China holds a huge amount of US Treasuries and foreign exchange reserve, it occupies some kinds of special dominant position in international economy and obtains the rights to governing some international resources. At the same time, US Treasuries and vast foreign exchange reserve have become the guaranty maintaining the exchange rate and basic currency value of RMB.
[Although the vast and long-term US Treasuries have become fictitious assets that cannot be cashed, this wealth is still the most important guaranty maintaining the stabilization of currency value of RMB. It is because that any market behavior attacking on RMB exchange rate on a large scale from outside would force China to dump vast US Treasuries, thus resulting in a global financial turbulence and crisis. However, as the current policy orientation of Chinese finance advocates diversifying and transferring its foreign exchange reserve and allowing marketization of exchange rate and China's economy is confronted with serious depression caused by the recession of export, the stability of RMB’s currency value would inevitably suffer serious challenges in the future. ]
On the other hand, under the unique exchange control system of China, dollars must be converted into RMB to enter into Chinese market. Therefore, dollars become a special source of RMB reserve, which is used to pay for investment and consumption. The inflow of vast RMB reserve is an important capital source supporting the rapid development of China's economy in the past ten years.
China-US relations mainly include two aspects: one is trade, the other one is investment. The key factor of both aspects is the exchange rate. In the past ten years, the United States kept pressuring RMB into appreciating. As RMB maintained a trend of appreciation in a long term, the United States utilized dollars (includes dollars flowed back from debts) to invest in China and convert dollars into RMB assets to get profits. And then, by converting RMB into dollars, the United States could earn exchange rate differential between dollars and RMB utilizing the appreciation of the RMB (refer to The Storm of Exchange Rate by He Xin, 2010).
Due to the exchange control system of China, the United States cannot convert all its gains in China into dollars to shift its gains from China to other countries, thus forming domestic foreign assets and domestic American assets in China. A considerable amount of these capitals stirs up trouble in stock markets.
Why does the United States keep pressuring China into accelerating the opening up of finance, deregulating and realizing the free convertibility under capital account? It is because only in this way can it freely repatriates its gains at any time.
It also can be seen that fantasts, who preach that China will surpass the United States and become the most powerful country in the world only according to the so called GDP figures, know nothing about actual base of China-US relations, the dependence of China's economy on the United States and the real economic reality of this world.
He Xin says, Chinese people do not know the reasons why they become rich, poor, flourishing or declining. China's elites are a lamentable, ignorant and retarded group.