Q&A With Derek Scissors on China's Economy
Driven by a near obsession with economic growth, Beijing has extended the state’s reach into the economy. Instead of urging the Chinese government to resume extensive market reforms, Washington should encourage it to focus on a narrow range of feasible measures.
Marc Richards: What hope does China have of becoming the global economic superpower, replacing the dominant role played by the United States? Is such a scenario inevitable, impossible, or neither? And will it depend on internal decisions the regime in Beijing takes or does not take?
A: You have half of it -- China's ascendance is neither inevitable nor impossible, and it will depend on policy choices. There is an obvious need for efficiency in China's use of natural resources, where water may become more important than energy. China will also increasingly need an efficient labor market. Demographic changes are going to first reduce labor force growth, then eventually cause an outright contraction. The other half of the story is U.S. domestic policy, but I'll stay on the western side of the Pacific.
Kazushi Minami: Although Beijing still controls the exchange rate of the renminbi, it has been slowly revaluing its currency since 2005. It seems that in the long run Beijing is shifting its currency policy to a free exchange rate. (The pace of its reform is slow because of the fear that a rapid economic reform could cause a collapse of the economy, as in the Soviet Union or Thailand.) Does this mean there is a possibility that Beijing will stop purchasing U.S. bonds in the near future?
Linda Morse: Where would China invest its money if not in U.S. Treasury bills and other U.S. investments?
A: The only place for China to invest the sums it is currently accumulating is the U.S. bond market. No other country and no other asset market can absorb $400 billion annually -- not gold, not oil, not European stocks, nothing. Unless China's current account surplus unexpectedly and dramatically falls later this year or next, it will continue to be a massive buyer of U.S. bonds.
I see very little exchange rate liberalization. The renminbi has been more, not less, tightly pegged to the dollar over the past year. That tightening began in June 2008 and thus predates the Lehman Brothers collapse.
Andrew De Stefano: Has the economic downturn caused Beijing to rethink its market liberalization policies? If yes, is China merely slowing down the introduction of new reforms, or is it also scaling back previously enacted free-market policies?