An Analysis Of China’s Internal And External Imbalances From The Perspective Of Intenrational Monetary System Asymmetry

Since its reform and opening up, China has to a large degree joint the integrationof global economy and finance. As an important player obeying the global “gamerules” such as international monetary system, China has been increasingly influencedand restricted by these “rules”. Under the dollar standard, China faces not only hugepressure from the external imbalance, but also a seriously distorted internal economy.On the one hand, China has accumulated the largest foreign-exchange reserves in theworld as a result of its long-term trade surplus, and therefore has suffered substantiallosses due to the constant depreciation of US dollar; one the other hand, it remains alow domestic consumption. In contrast, the US, the centre of the current internationalmonetary system, with a large current account deficit, managed to support itsexcessive consumption by ceaselessly issuing bonds to other countries like China,relying on the international monetary status of US dollar. In such a fragile “game"mode, the dollar standard eventually caused the US subprime mortgage crisis. Whenthe crisis occurred, the US government and some scholars owed China’s andAmerica’s internal and external imbalances and the financial crisis to China’sexport-oriented economic growth mode driven by export and its high savings and lowconsumption. However, some other scholars made a comprehensive survey of the rootof the global imbalances from aspects of abuses of the current international monetarysystem and the existing asymmetries in particular. They have pinned their hope on thereform of the international monetary system to eradicate imbalances and advocated abigger role of RMB in the international monetary system.This paper concerns the following issues. Whether the dollar standard thatsovereign credit currency serves as the international reserve currency caused thecurrent global imbalances or not? How will this international monetary systeminfluence the adjustments of global imbalances? Under the dollar standard, is thenon-international currency status of RMB the reason for China’s internal and externalimbalances in the past few decades? If so, what influence would the increasingly internationalized RMB with its rising status exert upon the adjustment of Chineseeconomy’s internal and external imbalances? How to reform the internationalmonetary system in order to radically solve the problem of Chinese economy’sinternal and external imbalances and global imbalances? And for China, what are thedominant strategies?In order to answer these questions, this paper, based on history, reviews theasymmetric evolution of international monetary system since1880and itsrelationship with global imbalances. Then this paper focuses on the generalcharacteristics of the asymmetries of the current international monetary system, andthe fact that Chinese economy has suffered from internal and external imbalancesWith the empirical facts above, this paper, based on the monetary approach tothe balance of payments, analyzes whether the asymmetric international monetaryarrangements, under which one sovereignty country’s currency works as theinternational currency while other sovereignty countries’ currencies as peripherycurrencies (non-international currency), would lead to global imbalances and whetherthe global imbalances adjustments could go smoothly through exchange rateadjustments or not. The specific conclusion is that under the asymmetric internationalmonetary arrangements, international disequilibrium is unavoidable; exchange rateadjustments would not be efficient any more, and any policy made by internationalcurrency countries to adjust balance of payment could not avoid risks of causing anunstable international economy and even a financial crisis.After analyzing the common rule of the global economy, this paper basing on theDSGE model and NOEM model that has considered the asymmetric elements in theexisting international monetary system, focuses on the influence of RMB as a risingnon-international currency (i.e. increasing internationalization of RMB) upon internaland external imbalances in Chinese economy and its adjustments. The conclusionsshow that the non-international reserve status of RMB is an important reason forinternal and external imbalances in Chinese economythe long term low domesticconsumption and high savings, the long term surplus in balance of payments and theexcessive foreign exchange reserves; the huge foreign exchange reserves havebrought about substantial cost and “excessive losses”; the rising status of RMB—an increasing internationalization of RMB would contribute to boosting domesticconsumption and relieving the internal and external imbalances of China.Based on the analysis above, this paper also studies the direction of internationalmonetary system reform and the options of optimal, feasible policy for China in orderto eradicate the influence of the existing international monetary system upon globaleconomy and the internal and external imbalances in Chinese economy. Theenlightenment on policy is as follows: the comparatively optimal method to solvingthe internal and external imbalances in Chinese and even global economy is toestablish a multiple international monetary system with currencies like US dollar,RMB, and Euro being the main international currencies; for China, the promotion ofthe internationalization of RMB in a proper and steady way is of crucial importanceto solve the problem of internal and external imbalances of China’s economy.