A tiny peek at the USA trade deficit from the other side of the world...
asia.news.yahoo.com
Tuesday April 23, 12:13 PM
Chinese academic tells Asia to rely less on U.S. economy
By Alan Wheatley, Asian Economics Correspondent
TOKYO (Reuters) - East Asian economies must band together to reduce their dependence on the United States in case America's growing current account deficit produces a global financial shock, a top Chinese academic said on Monday.
In an interview with Reuters and in a presentation to a conference on Asian economic integration, Yu Yongding, director of the Institute of World Economics and Politics, said it was not rational for East Asia to keep running trade surpluses with the United States and thus keep piling up foreign exchange reserves.
"East Asia countries collectively, as the biggest exporter and lender to the U.S., are facing great risks. They must do something before it is too late," Yu said in his paper.
"Regional economic cooperation provides a way to diversify risks and avoid being trapped in a foreseeable disaster," said Wu, whose institute in Beijing is part of the authoritative Chinese Academy of Social Sciences.
Yu is the latest in a long line of economists to warn that the U.S. current account deficit, forecast to reach five percent of gross domestic product (GDP) this year, cannot keep growing forever.
The International Monetary Fund sounded the same alarm last week but senior U.S. Treasury officials played down the concern, saying the deficit reflected America's undiminished attraction to foreign investors because of its high productivity.
Yu cited a recent estimate by investment bank Goldman Sachs that America's stock of net external liabilities could reach $5.8 trillion, or 46 percent of U.S. GDP, within five years.
Giving foreigners IOUs on this scale was nothing less than a Ponzi scheme that could end in tears any day, he said.
"World trade is now a game in which the U.S. produces dollars and the rest of the world produces things that dollars can buy. East Asian economies are financing spendthrift American consumers and paying seignorage to the U.S. government. This is unfair," Yu said. Seignorage is the profit a government makes from issuing currency.
PLAYING SAFE
Yu acknowledged that economists have been predicting a brutal correction to U.S. trade and capital flows for years, but he said East Asia should play safe.
"I don't know when this will happen, but if you still believe in economic theory, sooner or later we will reach this point," he told Reuters. "We should be on the safe side."
China held $227.6 billion in foreign exchange reserves at the end of March, the second largest in the world behind Japan, and Yu said he was not in favour of adding to them.
Nobel Prize-winning economist Joseph Stiglitz earlier told the conference that governments pay a big "opportunity cost" by piling up foreign reserves that could otherwise be spent or invested more profitably at home.
If the government were to agree, the result would be upward pressure on China's yuan , which the central bank manages in a tight range of 8.2760 to 8.2800 per dollar, Yu said.
He predicted the yuan would remain strong in any case, supported by China's trade surplus and foreign direct investment inflows, but said the government would keep open the option of devaluation in case other countries in the region did the same.
"It seems that if the yen falls under 150 per dollar, a competitive devaluation will be difficult to avoid in the East Asian region," Yu said in his presentation.
This made it politically and strategically imperative for governments to strengthen their cooperation in the areas of trade and investment as a prelude to closer financial cooperation including the management of exchange rates, he said.
The conference was organised by the Research Institute of Economy, Trade and Industry, a think tank affiliated to the Japanese government.
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