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December 13, 2004

The Political Arithmetic of China

China's current GDP (at current exchange rates): $1,690 billion
China's foreign exchange reserves (stock):$540 billion
China's foreign exchange reserves (change in 2004):+$130 billion

Thinking that the long-run value of the renminbi is two-thirds of its present value leads to the conclusion that at the moment China is spending about $40 billion a year--2.5% of GDP--on its currency-support program. This sum is not recognized in China's budget or on its balance sheet. But it is very real.

Is this a big number--one that deranges China's internal political economy and cannot be sustained for very long? Or is it a small number--a cheap way to buy some insurance against shocks that would otherwise produce large-scale urban unemployment? I cannot decide.

Posted by DeLong at December 13, 2004 01:52 PM

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As it turns out the current accounts balance of China is approximately about forty billion and change.


So in other words it's not only sustainable but its a quid pro quo. China spends some billions supporting the US consumption deficit, the US tolerates the current accounts deficit in exchange for Chinese financing. In the mean time China get's hard currency to buy commodities and economic activity in the form of intellectual property and capital investment in order to stimulate its domestic growth.

Brad you're better than this. I know finals and the holidays frenetics must be distracting you but straighten out man!

Posted by: oldman at December 13, 2004 02:03 PM

Since the dollars that China is accumulating can in turn be spend on programs from foreign aid, to acquisition of resources, to providing for banking system reserves, I think the currency peg is sustainable. The currency peg has proven stabilizing for the Chinese economy. So, I am thinking the peg is a worthwhile and affordable economic stability insurance policy.

Posted by: anne at December 13, 2004 02:07 PM

Couldn't a George Soros type pull the rug out from under them like he did in UK?

Posted by: DRM at December 13, 2004 02:20 PM

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