Study On Internal And External Imbalance: Conflict Between Trade Strategy And Macro-policy

Since China's entry into WTO, the degree of foreign trade dependency has enhanced year by year, coupled with the scale of imports and exports expands rapidly, the total amounts of imports and exports topping 1, 100 billion dollars in 2004, foreign exchange reserves had already reached 609, 900 million dollars at the end of 2004. In the same period, resident's consumer price index rose rapidly since September of 2003, the whole year of 2004 (CPI) up by 3. 9%, there appears a new tendency in the economy of our country since 2002:upon inside economical operation, the prices of the real estate have soared continuously and caused upsurge of the investments in the fixed assets , CPI from gliding slowly to rising high continuously; as to external economy, the fast expansion of the total amount of imports and exports in recent years brings the issues of exchange rate of RMB international , political , and the focus of disputes.The signs show that With the rapid expansion of the scale of international trade of our country in nearly three years, disequilibrium characteristic of the great amount of foreign exchange reserves and the inflation induced by resources endowment constraint is more and more explicit.Internal and external imbalance on the policy layer, is the conflict between the monetary policy and the single currency peg. Based on general trade theory and practices, the great amounts of foreign exchange reserves is the result of succeeding in pursuing trade strategy for a long time, and overheated investment and inflation , considered to be the monetary phenomena. Though the reforms on system of exchange rate and RMB appreciation become the focus of arguments, there is lack of overall analyses and considerable package scheme.When below the surface, disequilibriurn is the inexorable result derived from endogenous defect of institutional arrangements under export promotion strategy domination. The non-balanced growth mode under trade strategy, has not only caused the scale of the foreign exchange reserves, but offered "excessive purchasing power " that intrigues forming and diffusion of the inflation, the bases of it are the dual economical structure and the labor resources endowment. Soft budget constraint and government' s intervention are the two main causes for internalimbalance, and a pecul iar feature of internal imbalance is that the induced factors of inflation and deflation exist contemporaneously.A good way to illustrate these dilemmas is to consider a classic analysis of macroeconomic policy in an open economy: under export promotion strategy domination, export-oriented industries which take advantage of low labor and land costs have accumulated a magnitude of currency reserves, which brings about over-supply of money internally, thereby .accompanied with new cycle of investment in real estate driven by the governments, the economy experiences inflationary pressures. An internal equi I ibrium is achieved if there is an inflationary pressure the economy wi I I require further adjustment in prices, and to maintain price constant, the country would need to have contraction and privatizations policies, but under pegged currency rate system, monetary policies lose its independence, external disequilibrium pushing it much further from internal balance,. Accordingly, price level rises, which in turn reduces trade surplus .together with capital outflow, especial ly the shock from speculative attack .external disequilibrium would convert the current account surplus into the current account deficit , whether external equi I ibrium is restored wi II rely on currency devaluation, which probably causing a sharp recession. In effect, fear of speculative attack has paralyzed macroeconomic policy, and even forced it into acting perversely.Internal and external balance is the primary conditions for macroeconomic stabi I ization, its meaning to developing country goes far beyond rea Im of economy . The f i nanc i a I crisis in Southeast As i a ( Tha i I and in 1997 ) essentially is the consequences arising from serious internal and external imbalance. So what are the options?1. Hold the line on the exchange rate, and rely on gradual reductions in relative costs via productivity increases and deflation relative to the rest of the world to restore internal balance. In principle this should eventually work, all experience suggests that this is an extreme I y protracted and uncontro 11 ed process. Even as i de from the sheer economic cost, can the social and political fabric stand the strain?2. Impose temporary currency controls to prevent a speculative attack, But currency controls are hard to implement and enforce, they disrupt normal trading relations, and they may impair confidence for a longtime to come.3. let the exchange rate float .which brings about an immediate adjustment in costs measured in terms of other countries' currencies, by any measure the floating economies did better than the hard-currency countries.. In Chinese practices, recovery of internal and external balance is basically to rebuilt institutional frameworks and shift export growth pattern. To avoid rapid depletion of resources, under the overall goalof creation of the harmonious societies, as for institutional layer, putting forward marketization of the factor of production actively, and eliminating the distortion of allocation of resources is essential. El iminating forming mechanism of the internal and external imbalance via the monetary pol icy independent from exchange rate system is one of reasonable options; the intrinsic stabi I ity of the economic systems that will provide pol icymaker with absorbing economy fluctuation platform are the long- run objects in which government' s confidence is one of the key elements .