原标题：HeXin：Strange economic relations between China and the United States
He Xin: the Specific and Fantastic Economic and Trade Relationsbetween China and the United States
[Note: This essay can explain the real economic base of “new modelof great powers’ relations between China and the United States” andwhy China and the United States cannot do without each other.However, it also can be seen that those fantasts, who believe Chinawill surpass the United States and become the most powerful countryin the world according to the so called GDP figures, nearly knownothing about the reality of this world.]
Please have a look at the following data on commerce andtrade:
After acceding to WTO and becoming a leading exporter of consumergoods in the world in 1990s, China has turned the United Statesinto its largest export market.
According to official data released by the US Commerce Department,in 2014, the United States imported 466.66 billion dollars of goodsfrom China, accounting for about one fifth (accurately, it is19.9%) of total import of the United States. China was the largestsupplier of goods imported by the United States.
Moreover, the worth of medium and long term US Treasuries purchasedby China was in the range of 300 to 400 billion dollars in2014.
The above figures mean that: in 2014, the United States paid formost goods (80%-90%) it purchased from China with receipts forloans or IOUs.
In fact, such pattern of China-US economic and trade relations hasexisted for many years. Its basic operational mode is:
——The United States purchases goods from China and pays merchantsin dollars.
——As China’s exchange control system is controlled by the StateAdministration of Foreign Exchange, dollars enter into the Bank ofChina. The bank pays payments for goods to merchants inRMB.
——After gathering the dollars earned, the State Administration ofForeign Exchange purchases US Treasuries through authorizedagencies (such as China Investment Corporation, China InternationalCapital Corporation limited, etc.). China obtains receipts forloans (that is, IOUs) from the United States, while dollars flowback to the United States.
——That is to say, the United States actually takes away lots ofgoods from China utilizing IOUs (US Treasuries) everyyear.
Therefore, although the Federal Reserve always issues vast amountsof dollars in recent years (such as Q3, Q4 and maintaininglong-term low interest rate policy of dollars, etc.), as what theUnited States paid for Chinese goods are IOUs, the inflation ratealways stays very low in the United States.
What China obtains from the United States are IOUs of dollar debts.A small part of such IOUs can be converted into dollars and buyinternational goods. Most of such IOUs are virtualized as a conceptof long-term debts. However, China can gain some interests from USTreasuries every year (the rate of return is about 2%-3%. Theearning was about 10 billion dollars in 2014).
Seemingly, both China and the United States are in its proper placeand both sides are satisfied. But, it is actually a highlyasymmetric economic and financial relation.
Now, China is the largest creditor of the United States. But infact, it is very hard for China to call in all money lent. If Chinadumps a large number of US Treasuries, a dollar crisis would arise,as well as a very serious international financialcrisis.
The United States greatly benefits from China-US trade. Every year,most Chinese goods the United States obtained are actuallyequivalent to China’s gifts. Therefore, China is the largesteconomic tributary of the United States in the world. While theUnited States is heavily indebted and issues vast amounts ofdollars, the reason why it can keep a very low inflation rate isthat it can utilize dollar debts (IOUs) to purchase goods. In acertain sense, the rise of China's economy and its huge export tothe United States has supported the longest economic boom of theUnited States in the recent twenty years.
Two reasons contribute to the long-term existence of such specificand asymmetric economics and trade relations. One is the uniqueforeign exchange system of China. The other one is the specialmonopoly position of dollar, which is the only universal currencyin the world.
But on the other hand, after grasping a huge amount of dollarassets, utilizing dollar’s special monopoly position in the world,China is also benefited. As China holds a huge amount of USTreasuries and foreign exchange reserve, it occupies some kinds ofspecial dominant position in international economy and obtains therights to governing some international resources. At the same time,US Treasuries and vast foreign exchange reserve have become theguaranty maintaining the exchange rate and basic currency value ofRMB.
[Although the vast and long-term US Treasuries have becomefictitious assets that cannot be cashed, this wealth is still themost important guaranty maintaining the stabilization of currencyvalue of RMB. It is because that any market behavior attacking onRMB exchange rate on a large scale from outside would force Chinato dump vast US Treasuries, thus resulting in a global financialturbulence and crisis. However, as the current policy orientationof Chinese finance advocates diversifying and transferring itsforeign exchange reserve and allowing marketization of exchangerate and China's economy is confronted with serious depressioncaused by the recession of export, the stability of RMB’s currencyvalue would inevitably suffer serious challenges in the future.]
On the other hand, under the unique exchange control system ofChina, dollars must be converted into RMB to enter into Chinesemarket. Therefore, dollars become a special source of RMB reserve,which is used to pay for investment and consumption. The inflow ofvast RMB reserve is an important capital source supporting therapid development of China's economy in the past tenyears.
China-US relations mainly include two aspects: one is trade, theother one is investment. The key factor of both aspects is theexchange rate. In the past ten years, the United States keptpressuring RMB into appreciating. As RMB maintained a trend ofappreciation in a long term, the United States utilized dollars(includes dollars flowed back from debts) to invest in China andconvert dollars into RMB assets to get profits. And then, byconverting RMB into dollars, the United States could earn exchangerate differential between dollars and RMB utilizing theappreciation of the RMB (refer to The Storm of Exchange Rate by HeXin, 2010).
Due to the exchange control system of China, the United Statescannot convert all its gains in China into dollars to shift itsgains from China to other countries, thus forming domestic foreignassets and domestic American assets in China. A considerable amountof these capitals stirs up trouble in stock markets.
Why does the United States keep pressuring China into acceleratingthe opening up of finance, deregulating and realizing the freeconvertibility under capital account? It is because only in thisway can it freely repatriates its gains at any time.
It also can be seen that fantasts, who preach that China willsurpass the United States and become the most powerful country inthe world only according to the so called GDP figures, know nothingabout actual base of China-US relations, the dependence of China'seconomy on the United States and the real economic reality of thisworld.
He Xin says, Chinese people do not know the reasons why they becomerich, poor, flourishing or declining. China's elites are alamentable, ignorant and retarded group.
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