We agree, it is a very long title. The above is the header of a release report for a study – entitled China as a Net Creditor: An Indication of Strength or Weaknesses?, by Xin Wang – published in the China & World Economy journal. It states that “China’s incredible rise as a net creditor at such an early stage of development is very rare; and might actually reflect weakness rather than strength.”
We’ll make no comment on any of its content, but will publish the summary report in full below – so you can make your own call.
“China’s international investment position has been characterized by
its huge and increasing net foreign assets – and despite its low per
capita incomes and relative scarcity of capital – is positioned as a
net creditor. Her net foreign assets in 2006 accounted for 25% of the
country’s GDP growth – in stark contrast to many countries who hold a
higher GDP per capita and still have relatively large net foreign
liabilities.
There is no reason for China to be complacent in spite of her large
current account surplus and quick build-up of foreign exchange
reserves. As a very poor country in terms of GDP per capita, China
continues to provide large amount of capital to the outside world -
including the richest countries. It is quite unusual and may be
reflective of deeply-rooted institutional and structural problems.
Some of the issue China face include underdeveloped capital markets,
biased resource allocation and a defective social security system – all
of which have contributed to her rapid increase in national savings
which have not been fully and efficiently utilized. The high cost of
China’s foreign liabilities and her corresponding low returns on her
foreign assets also mean that China’s has yet to generate positive
return, while facing potentially large exchange risks.
China must readjust her development model and make improvements to her
social security system in order to put the country’s economic
development on a more solid base. Some of the recommendations include
the gradual opening up of domestic financial markets, loosening of
restrictions on domestic private firms, adjusting preferential policies
enjoyed by foreign-funded firms as well as gradually enlarging the
channels overseas investments to build up China’s domestic asset
management capabilities.
China must speed up her economic reforms and allow the market to play a
fundamental role in resource allocation. Only then will the resulting
decrease of net foreign assets no longer become a cause for concern,
but rather, a sign of good times.
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