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Special> G20 London Summit> Expert's View
UPDATED: February 2, 2009 NO. 5 FEB. 5, 2009
CRISIS FOCUS: The Real Blame
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Former U.S. Treasury Secretary Henry Paulson fingered a new scapegoat for the world's economic problems. He said massive savings accumulations in countries such as China helped to trigger the crisis by squeezing interest rates and pushing investors toward riskier assets, the Financial Times reported on January 2. Zhang Jianhua, Director of the Research Bureau at the People's Bank of China, rebutted Paulson's comments as "extremely ridiculous and irresponsible" in an interview with Xinhua News Agency. Edited excerpts of his statements follow.

Roots of the crisis

The U.S. policies of debt financing and large-scale tax reductions were key causes of the financial crisis, because they gave rise to bubbles in the housing market and aggravated imbalances in the U.S. economy.

The International Monetary Fund (IMF) was also responsible for the crisis. It has paid too much attention to financial risks in emerging and developing economies and not enough to those of developed countries, especially economies issuing major reserve currencies. The organization also did not respond quickly enough to the crisis. At the micro-level, many banks-U.S. investment banks in particular-ignored corporate governance and risk management while pursuing short-term profits and excessive product innovations. The financial regulators in developed countries, who believe in "laissez faire capitalism," failed to monitor risk accumulations in their financial systems or to take effective measures when problems emerged.

Finding an excuse

Major Western economies are attempting to find an excuse for their own policy and regulatory failures by blaming China for the crisis. I am afraid these countries also will find an excuse to issue trade protection measures against China in the future. Instead, the expansive U.S. macro-policies and debt-financed consumer spending should be blamed for their high trade deficit and low savings rate, respectively. These policies have catalyzed spending sprees by consumers and the federal government, which in turn have reduced the country's savings rates. While increasingly dependent on imported consumer goods, the country has imposed all kinds of restrictions on hi-tech products exported to developing countries, which has helped create its rising trade deficit to some extent.

Asian emerging markets, including China, increased their foreign currency reserves and domestic savings in recent years, because they were advised to do so by the IMF to draw lessons from the 1997 Asian financial crisis. China had not had an obvious increase in its foreign exchange reserves before 2003, while the United States already had low savings rates and high trade deficits since the early 1980s.

Global economic imbalance

China's trade surplus accumulation reflects the global shift of the manufacturing of low value-added and low-tech products from developed countries to developing countries in the past two decades. Developed countries' growing dependence on the import of these products over the years has given rise to trade surpluses in emerging markets, including China. Not only developed countries but also some emerging market economies like oil exporters have been shifting their manufacturing to China during the past decade. Low imports are also not what China wants. China's rapid economic growth has generated great demand for hi-tech products, but developed countries' restrictions on the export of such products to China have prevented imports from increasing significantly in China.

As the issuer of a major reserve currency, the U.S. Government should pursue not only the country's economic goals, but also the stable growth of the world economy. The Chinese Government has pledged to continue to boost domestic consumption and make the Chinese economy less reliant on exports and more dependent on the domestic market.



 
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