FINANCIAL CRISIS IMPACTS ON SINO-AMERICAN RELATIONSHIP
RECESSION'S AFFECT ON CHINA .
ASIAN MONETARY FUND .
CHINA'S TRADE POLICIES AND THEIR CONTRIBUTION TO THE FINANCIAL CRISIS
Monetary policy is the study of circulation of money, the granting of credit, the making of investments and the provision of banking facilities and international finance is studying it on an international level.[footnoteRef:2] Usually the affect can be seen in exchange rate and foreign investment and international trade. This includes the analysis of global financial markets, cross-country capital flows and currency, international projects, and overseas investments. [2: Merriam-Webster Online Dictionary: http://www.merriam-webster.com/]
US Monetary Policies have a far reaching effect on the other side of the world. Primarily due to U.S. Dollar being the reserve and default currency for trade transaction. Every time Federal Reserve decides to make a policy such as the recent Quantitative Easing (QE) where the U.S. will buy $600 billion of treasury bonds to boost economy and rising unemployment rate, economies around the global market are shaken to the core. Financing bidget deficits with simply printing more currency is not only unsustainable but impacts investors holding massive U.S. debt.
International Finance is regulated by various global institutes which tend to help the individual investors on how to deal with the global futures, options available and the Foreign Exchange (FOREX) market. China's International Finance is made up of banking and non-banking financial institutions, trade and project finance and securities markets[footnoteRef:3]. China is one of the countries greatly involved in overseas investments and trade export. However, China's capital flows are largely being affected by the ongoing recession in the United States. Both China and the United States are in a battle over intervention in the FOREX markets resulting changes in both the Chinese currency Renminbi and the U.S. dollar. [3: Ross Levine, 2002. Financial Structure and Economic Growth: Cross-Country Comparisons of Banks, Markets, and Development, MIT Press, Cambridge, Massachusetts]
2. Benefits of Global Finance
It promotes domestic investment and growth through capital imports
Its global financial institutions prevent excessive domestic regulation
It presents important information on the important areas of investments, therefore, leading to effective capital allocation
It provides the countries access to capital markets across the world
Also the worldwide cash flows help correct the bad government policies
Overall, International Finance leads to a more effective banking system through a healthy competition between countries
International Finance promotes the integration of economies helping the facilitation of easy capital flow2. This free transfer of funds will help result in more equality among countries which are part of global financial system.
3. Global Finance Analysis
The performance of global financial markets depends upon the total number of securities that are traded in each of the financial markets[footnoteRef:4]. For example, when a particular market closes with most of its securities on the higher side, then the market is said to have perform well. The global financial markets include funds from all the countries which are part of it, therefore, giving the countries access to capital markets across the world. This enables the countries to borrow during difficult times and lend during good times further assisting the country to maximize its trade finance. [4: Gregory, Neil, Stoyan Tenev and Dileep Wagle, 2000. China's Emerging Private Enterprises, International Finance Corporation, Washington, D.C.]
The present market economy is working very fast on a global scale because the investment traders do not limit trading in securities to just one or two markets in their country of residence. Instead the traders invest in many markets across the globe resulting in increased capital flow for the desired country. Because more and more companies are investing in the financial markets on a global scale, this has led to a healthy competition between countries.
-Cross-Country capital flows and currency[footnoteRef:5]. Countries with lower currency values and huge capital flow promote international finance by means of trade services such as increased export. [5: Ross Levine, 2002. Financial Structure and Economic Growth: Cross-Country Comparisons of Banks, Markets, and Development, MIT Press, Cambridge, Massachusetts]
- International projects: The participation of countries in international projects has led to an increase in the services provided by international finance, therefore, promoting its growth.
- Overseas investments: Countries investing across the globe has caused profound growth in the economy, hence, leading to an increase in the international trade.
4. Global Institutes in International Finance
The global institutes[footnoteRef:6] which regulate various aspects of international finance are: - [6: Tenev, Stoyan, Chunlin Zhang, and Loup Brefort, 2002. Corporate Governance and Enterprise Reform in China, Building the Institutions of Modern Market, World Bank, IFC.]
-International Finance Corporation (IFC): plays an important role in providing technical assistance to the businesses and governments of developing countries supporting investments in the private sector of developing countries to promote their growth. It is the main source of loans and equity financing for projects undertaken in the private sectors of the developing countries4.
-World Bank: This is responsible for funding those projects, primarily in the developing countries, which are not financed by the private sector[footnoteRef:7]. [7: Allen, Franklin, and Douglas Gale, 2000a. Comparing Financial Systems, MIT Press, Cambridge, MA.]
-World Trade Organization (WTO): This is responsible for resolving trade disputes as well as negotiating different trade agreements among its different member nations6.
- International Monetary Fund (IMF): is known as the final solution for countries in a financial crisis for example trade deficits and currency crisis. The relief amount which it offers is in relation to the country's contribution in the global trading system. It is responsible for monitoring the payments balance of its member countries6.
5. International Finance in China
China's Finance structure is regulated by banking and non-banking financial institutes[footnoteRef:8]. Banking institutes are People's Bank of China which is the central bank of China similar to the U.S.'s Federal Reserve System. It sets policies which govern specialized banks, which include the industrial and commercial banks of China. Bank of China also oversees foreign banks, which are responsible for collecting bills and remittances from overseas, discounting foreign exchange bills and arranging the documentary credit. [8: Schipani, Cindy, and Junhai Liu, 2002. .Corporate Governance in China: Then and Now, Columbia Business Law Review, Vol. 2002, 1-69.]
Non-banking institutes are International Trust and Investment Corporations which are designed to promote investment in and from China, make foreign exchange guarantees, raising funds via deposits, issue bonds and overdrafts, making short-term and long-term loans and if required then borrow from foreign banks.
6. The Exchange Rate Fiasco
Chinese Yuan had been historically pegged against the U.S. Dollar up until the July 2005. Some argue that it was undervalued by as much as 40%.
Yuan is now pegged against a basket of currencies like some of the Middle Eastern countries but after much pressure from global economic powers and mainly the U.S., the Chinese Economist have decided to slowly and gradually transition the Yuan towards a free float currency we see around the world.
It has been United States Govt. argument that Yuan is till devalued by at least 25% in a U.S. Treasury Department report. The undervalued Yuan gives Chinese exporters an unfair competitive advantage resulting in a loss of American jobs has caused hefty trade deficit, according to the report. Whereas Chinese Commerce ministry rejects the argument blaming "globalization"[footnoteRef:9]. With China remerging as a world economic and military power, it is understandable that it does not want to be seen giving in to the American pressure on revaluation of Yuan. U.S. has resorted to threats of sanctions against China on the charge of manipulating its currency. [9: "China Denies Yuan Behind U.S. Trade Gap," Manila Bulletin 16 Mar. 2010: NA, Questia, Web, 18 Mar. 2011.]
China's economic strategy is to keep the Yuan/dollar fixed as it serves as an anchor to all internal prices. But to avoid U.S. protectionist threats, China has agreed to revalue its currency at 6% annually since 2005. But the calculated revaluation discouraged capital outflows from China, which still led to huge balance of payment surplus.
People's Bank of China in order to prevent renminbi to climb upwards decided to buy dollar assets in terms of U.S. Treasury. Until July 2008 China has amassed about $2 trillion worth of fore reserves. There was still an excess supply of renminbi which inflated Chinese economy to 8% in 2008.[footnoteRef:10] [10: Ronald I. Mckinnon, "Solidifying a New G2: China and the United States Should Stabilize the Yuan/dollar Relationship," The International Economy Wntr 2009,Questia, Web, 18 Mar. 2011.]
IMF does not necessarily share the same views with United States, when IMF Manager Director Dominique Strauss-Kahn pointed that "revaluation of the renminbi goes in the right direction," it still will not solve the financial crisis[footnoteRef:11]. [11: "IMF Chief Says Chinese Yuan Still Too Low," Manila Bulletin 29 June 2010: NA, Questia,…