The world is asking whether China could bail out other floundering economies from the ongoing financial crisis.
Pessimists hold that China, the world's third largest economy, won't be unscathed by the global economic downturn as it is heavily reliant on exports. China's two largest trade partners, the European Union and the United States, have been drastically hit by the financial crisis. China is expected to face a severe "overcapacity crisis" as export demand shrinks.
But I am not so pessimistic. I agree that China is facing unprecedented difficulties because of overcapacity, but I disagree that there is no way out. Today, I see a great opportunity for China. The current crisis indicates that an unreasonable and inequitable international financial system is going to fall, and a new and comparatively just order will emerge which a stronger China can surely benefit from.
From this perspective, we can hardly consider it bad news for China that it has lost its biggest consumer, the US. The world's largest producer, China, and the largest spender, the US, were used to a pattern: US companies invest in China, China exports its products, earns dollars, and buys US Treasury bonds.
It is an unfair pattern. The US government attributes the trade imbalance to China. It accuses China of manipulating its foreign exchange rate. US companies earn large profits from China; US investors share dividends from the profits made in China, and US consumers enjoy cheap Chinese goods that use up China's resources and energies. Their manufacture also pollute China's environment.
What does China gain? Only dollars and US Treasury bonds. What can China buy with these bank notes? Buy US resources? Washington lawmakers rejected China National Offshore Oil Co Ltd's acquisition bid for Unocal Oil Company, the ninth largest oil firm in the US. Buy US high technologies? The US deems it unlawful. Buy US financial institutions? The US sets a 10-percent limit for foreign capital to buy into US companies. Can these dollars hold their value? The US interest rate is nominally close to zero and actually gives negative returns.
Some economists have never tired of repeating that China cannot live without US demand. I think it is the opposite. Without demand from the US, and even the EU, China can shift to the huge potential markets in Asia, Africa and Latin America.
China can pay in dollars or in yuan to buy local resources and improve local infrastructure. Then local residents can use the money to buy "Made in China" products. China can transfer its overcapacity to these areas and help boost local economies. Both are mutually beneficial solutions.
If the countries in Asia, Africa and Latin America worry that the yuan may depreciate in the future, they may ask China to peg the yuan directly to gold or to be partly pegged to the value of their mineral resources. That is a fair game.
Zhang Tingbin is a columnist and deputy editor-in-chief of China Business News
(China Daily 03/16/2009 page2)