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Policy Brief
Projecting China's Current Account Surplus
[pdf]
William R. Cline
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For several years China has run current account surpluses that have been widely seen as the most serious source of global imbalances on the surplus side. Its exchange rate intervention limited appreciation of the currency and led to a buildup of external reserves to more than $3 trillion. Nonetheless, the surplus has fallen from 10 percent of GDP in 2007 to 2.8 percent in 2011, even though in September the International Monetary Fund projected the 2011 surplus at 5.2 percent of GDP and forecast a rebound to 7.2 percent of GDP by 2016. This policy brief examines whether the moderate 2011 surplus was a transitory aberration or a sign of a new trend. A statistical model explains the bulk of the reduction in the surplus as the consequence of the real exchange rate appreciation of about 20 percent that occurred from 2005–06 to 2009–10. Slow global growth, a rising oil deficit, and erosion in the capital income balance were additional causes. Projections based on this model and another used by the author indicate that if the exchange rate remains unchanged, the surplus is likely to be in a range of 2 to 4 percent of GDP in 2012–14 but rebound to 4 to 5 percent of GDP by 2017. If instead the government continues real appreciation at the 3 percent annual rate pursued since June 2010, by 2017 the current account would be approximately in balance.
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Op-ed
The G-20 Is Failing
Edwin M. Truman
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The leaders of the G-20 countries have played a crucial role in rescuing the world from the brink of economic and financial disaster. They agreed to an impressive agenda in Washington in November 2008, and at their April 2009 London summit committed themselves to an integrated strategy to rescue the world economy from the brink of depression, to reform international financial regulation, and to transform the governance of the world's most important global financial institutions. But now the G-20's accomplishments are in danger of unraveling, because these countries have failed to implement their agreements on reform of the International Monetary Fund (IMF). These reforms would enhance the role of the emerging market and developing countries and help to cement the commitment of those countries to the global system. A failure now would represent a setback for the still-precarious world economy. What should happen? Most importantly, the United States and the other G-20 countries should meet their international commitments by enacting the IMF reforms on the agreed-upon schedule, the first step of which looks likely to miss its October 2012 deadline. Failing to do so, the Administration can seek approval in the crowded post-election lame-duck session of the US Congress if enough of the rest of the countries have approved. Alternatively, the process should be restarted in 2013 by reforming the IMF quota formula and agreeing to a new large increase in IMF quotas by January 2014. All the required actions would then be presented to the US Congress as one package, and the G-20 would have caught up with its original agenda. These important reforms must not remain in limbo indefinitely. A failure to do what is necessary will put the global economy and financial system at risk by starving the IMF of permanent resources and sidelining it as the principal institution of global economic and financial cooperation. Without these reforms, if another crisis arises, the G-20 countries would have only themselves to blame.
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Op-ed
China's Next Generation Should Look to Zhu
Arvind Subramanian
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As markets await economic data releases from Beijing, it is easy to be complacent over China's mercantilist exchange rate policies. Foreign exchange reserves have stabilized at about $3.2 trillion, and the renminbi has appreciated by about 30 percent against the US dollar since 2005. Nevertheless, the renminbi problem is still not a thing of the past. Leaving aside the question of whether the world's fastest-growing and still-poor economy should be running such large (if shrinking) current account surpluses, the self-insurance motive for building reserves was met at least a trillion dollars ago. Even the desire for export-driven growth has become less attractive because of the overinvestment, inefficiency, and corruption associated with the range of policies supporting mercantilism. But policies remain mercantilist. The good news is that there is an opening for the reformist wing of the current Chinese leadership to follow the model of Deng Xiaoping's protégé and former Prime Minister Zhu Rongji to look abroad to address the problem. It should do so, for the benefit of China and the world.
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Op-ed
Egypt's Broken Economy
Mohsin S. Khan
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Egyptians' political aspirations have dominated the country's public life since the fall of President Hosni Mubarak. Unfortunately, as those aspirations are addressed, the economy has entered a steep decline, jeopardizing one of the revolution's main goals, namely improving Egyptians' living standards and welfare. Egypt is vulnerable not only due to unstable domestic politics but also due to depletion of its international reserves, threatening a currency crisis. The upcoming presidential election in May and the formation of a democratically elected government can potentially calm the political turmoil and lead to economic stabilization and revival. Otherwise, Egyptians' hard-won political gains may well be lost.
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Peterson Perspectives Interviews
Is the United States Dragging Its Feet on Europe?
C. Fred Bergsten discusses the factors behind the American reluctance to get China and others to contribute to more IMF funding for Europe.
Argentina Overthrows Conventional Wisdom
John Williamson explains why Argentina's nationalization of Spanish oil company holdings is self-destructive and discouraging to investors.
North Korea's Rocket Fizzle Creates New Dangers
Marcus Noland discusses the widespread fear that an unstable North Korean leadership will search for scapegoats and be compelled to test a nuclear weapon.
China's Declining Current Account Surplus, Part V
Joseph E. Gagnon says that while China has improved its record on currency, other countries have adopted the same unwelcome policies.
China's Declining Current Account Surplus Part IV
William R. Cline says China's declining surplus has been driven by a significant appreciation of the yuan, but the surplus will likely rise again in coming years.
China's Declining Current Account Surplus, Part III
Arvind Subramanian says that despite an improved current account balance, China should still be pressed to let its currency appreciate further.
Recent Blog Posts
PIIE Noted in the News and on the Web
Chinese Radio International
Leading US Economists to Attend Symposium in China
The Peterson Institute and the China Finance 40 Forum (CF40) will host a two-day symposium on April 27 in Beijing. PIIE experts Nicholas R. Lardy, Arvind Subramanian, Joseph E. Gagnon, Carmen M. Reinhart, William R. Cline, and Jacob Funk Kirkegaard will be attending.
Wall Street Journal
Rethinking 'Made in America'
USTR Ron Kirk draws upon J. Bradford Jensen's expertise in his op-ed on the strength of the US services sector. Jensen is author of Global Trade in Services: Fear, Facts, and Offshoring.
New York Times
Some Urge US to Focus on Selling Its Skills Overseas
The New York Times links to J. Bradford Jensen's latest book Global Trade in Services: Fear, Facts, and Offshoring.
CNBC
Pyongyang's Rocket Failure Could Result in Nuclear Test
CNBC turns to Marcus Noland for analysis of the implications of North Korea's failed rocket launch.
New York Times
Rocket Failure May Be Test of North Korean Leader's Power
The New York Times picks up Marcus Noland's blog, North Korea: Witness to Transformation, in reporting on North Korea's failed rocket launch.
New York Times Economix
The Imbalances in China's Economy
David Barboza interviews Nicholas R. Lardy about China's economic imbalances, the subject of his new book, Sustaining China's Economic Growth after the Global Financial Crisis.
The Diane Rehm Show
Spain's Clash with Argentina over an Oil Company
Jacob Funk Kirkegaard, research fellow at PIIE, joins Paul Isbell, Inter-American Dialogue; Daniel Kaufman, Brookings Institution; and Sophia Aguirre, Catholic University of America, on the Diane Rehm Show to discuss Spain's criticism of Argentina over the nationalization of the oil firm YPF.
Preview of Our Next Issue
Op-ed
Why I Changed My Vote
Adam S. Posen
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The Occupy Handbook
Contributors to The Occupy Handbook discuss the causes and implications of the recent Occupy movements around the country.
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