Our buddy, China

Here’s an alternate explanation. Ahead of the Strategic Economic Dialogue Summit between the U.S. and China (May 22–24, 2007), the People’s Bank of China issued an internal report titled “Looking At Global Imbalances From Another Perspective.” Because it’s an internal study and not available on the People’s Bank Web site (http://www.pbc.gov.cn/english), we have to rely on the Market News International report on it. And how did Market News get the internal report? We must assume that the People’s Bank wanted it to be disseminated.

According to Market News, the paper praises the U.S. for its current account deficit, which serves as the liquidity provider for the entire world, and liquidity supports growth. “The U.S. is actually acting as the central bank for the whole world,” according to the report. “The U.S. dollar is serving as the major currency for international trade and financial transactions…[G]iven expanding international
economic and financial activities, the issuance, circulation and use of U.S. dollars will not shrink, which means U.S. current account deficit will have to expand instead of shrink.”

The study also contends “The U.S. current account deficit is a result of the international monetary system but not the result of a low U.S. savings rate.” And we need it, since the post-war Bretton Woods FX system collapsed in 1971. The report’s implications are tremendous. First, China is going out of its way to be friendly and to show goodwill, even if impatient traders and American lawmakers want more concrete actions and less rhetoric. In the current situation, China is supporting a U.S.-centered world financial order, not rivaling it or defying it.