Zhang Monan

Drive hard bargain with US

By Zhang Monan (China Daily)
Updated: 2010-05-19 07:53

As the distributor of the world's leading currency, the US can hike dollar issuances to boost its ability to pay off its inflated national debt.

The dollar's devaluation has been used as a major means to reduce US government debt. From 2002 to 2006, as much as $3.58 trillion of US national debt evaporated due to Washington's increased dollar issuance or dollar devaluation.

Large-scale foreign direct investment (FDI) has also brought the US enormous economic returns.

Due to its adherence to the FDI strategy, Washington achieved a profit ratio of as high as 20 percent in its foreign assets investment from 2000 to 2006.

In a sound and well-developed international financial market, the liability-credit relations should be used as an important chip in political games and interactions among different countries.

What China should do now is ponder how to use its clout as the largest US debt holder and transform its enormous financial power into writing policies to its advantage, and improve its financial capability to fend off pressures from the outside world.

The country should make great efforts to push for the internationalization of its currency, the yuan. To this end, the country should strive to increase the renminbi's proportion in international trade settlements, develop the yuan into one of the leading investment currencies in the international financial market and then forge it into a leading reserve currency.

In the short term, the country should make active efforts to set up effective channels for yuan's foreign investment.

In the push for Capital Account Convertibility for the yuan, and keeping financial risks under control, the domestic currency market should be gradually opened up in order to help foreign players gain access to the Chinese currency and its use.

Effective measures should be taken to repatriate outbound yuan through the Qualified Foreign Institutional Investors (QFII) channels and push for more yuan settlements in services trade as well. Expanding the circulation of the yuan in the international financial market will help raise China's status as a major international creditor nation.

Great efforts should be made to set up a well-developed homegrown financial market in China. The country's status as a premature creditor nation is closely related with its underdeveloped financial market.

Given the existence of some defects in its financial structure, and the distribution of its financial assets and resources as well as their organization and management, China should set up a full-fledged homegrown financial market as soon as possible. That will help transform it from an investment-oriented to a savings-oriented economy.

Besides, the country should try to reduce its debt investments and, instead, increase equity investments which would help China enter new economic growth areas.

Effective steps should also be taken to adjust China's foreign assets structure in a bid to transform its capital advantages into institutional, resources and investment advantages through restructuring the country's global capital strategy.

The author is an economics researcher with the State Information Center.

(China Daily 05/19/2010 page8)