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Explore new cooperation in China-US economic relations

Editor: Li Kun 丨CCTV.com

08-11-2015 14:54 BJT

By Yu Xiang, PhD, director, division of American economy studies and associate research fellow, Institute of American Studies, China Institutes of Contemporary International Relations

Recently the media has reported on the upcoming visit by Chinese President Xi Jinping to the United States in September. Many are expecting the visit to push forward China-US relations. Economic areas remain an important part of furthering bilateral relations, hence the importance of correctly recognizing the new character of US economic growth.

To begin with, the structure of US growth is changing.

Judging from the proportion of the financial service sector within the entire US economy, which has not changed very much in the period from the first quarter of 2006 to the second quarter of 2014 when statistics were first used, it seems that the US economy is resuming its traditional dominant pattern in which the financial sector plays a big role. But if the data is checked structurally, the story or conclusion may be different. Data from the World Bank’s 2014 Global Financial Development Database indicates that a structural change has taken place inside the US financial service sector. Financial industry concentration rose from 22.1 percent in 1998 to 35.4 percent in 2011, but the ratio of the credit quantity to deposits declined from 78.1 percent in 1998 to 63.4 percent in 2011. Off-balance-sheet activities accounted for 36.6 percent of total bank income, down from 42.4 percent, revealing that this sector has been deleveraging.

Secondly, the way the US economy operates is changing.

The US government has acted differently since the global financial crisis by allowing the Federal Reserve to enact unconventional policies including quantitative easing, Operation Twist and forward guidance to ease monetary policy and inject massive liquidity into the market. Under this extreme easing, the Fed's asset debt balance sheet rapidly expanded from $860 billion to $4.5 trillion. The Fed asset debt balance sheet spiked at 15.1 percent of GDP in 2011, after remaining under 6 percent in the 10 years between 1998 and 2008.

The Obama administration also significantly enhanced oversight of the financial sector, particularly through implementation of the Volcker Rule by the Federal Reserve and other federal regulators to limit proprietary trading by banks. This was the country’s most stringent financial regulation for more than a decade. Another control was adoption of the rule to implement Base III which raised the minimum ratio of common equity tier-one capital from 2 percent to 7 percent proportionally across differently supervised financial institutions. Under the Dodd-Frank Act, the US Treasury Financial Stability Oversight Council in July 2013 designated American International Group and General Electric as nonbank financial companies, subjecting them to Federal Reserve supervision and to enhanced prudential standards. The Commodity Futures Trading Commission and European Commission agreed to work together on regulating swap/derivatives trades. And the Securities and Exchange Commission in July 2014 adopted reform rules for money market funds to reduce investor risk. The US financial sector is considered to have moved into an era of closer surveillance.

Thirdly, US manufacturing is reviving.

Since the financial crisis, the country's real economy has shown signs of expansion as the Obama government launched a series of promotional policies. The Manufacturing Enhancement Act is designed not only to rebuild conventional manufacturing but also boost high-end and high value-added manufacturing, advanced technology and production of products that can only be made in the US. These unique products would be those especially large, sophisticated, precious or highly systematic/integrated items that would circumvent competition from newly industrialized countries that are producing lower-end products.

Obama's policies to revive the real economy have been enhanced by increased US manufacturing labor productivity which has gradually risen since 2009. Forecasts for productivity are for average annual increases of 1.67 percent from 2013 to 2023, not only outpacing the crisis-level 0.95 percent but also higher than the 1.5 percent between 1980 and 2012, according to February 2014 US Department of Labor statistics. Total productivity in the nonfarm business sector is projected to rise 1.25 percent on average annually, slightly higher than the 1.24 percent during the crisis and its historical average of 1.11 percent. The traditional view of manufacturing as associated with high unemployment should be changed. Among the unemployed population in various different sectors, the proportion in manufacturing was lower than that of agriculture, construction and retail. Changes in the real economy induce a shift in the financial or fictitious economy.

The above new characteristics of US economic growth give us some useful clues to explore areas of cooperation.

Firstly, China and the US could and should enhance manufacturing cooperation in the era of the industrial internet. The US is the leader in digitization and information technology in general. The two countries have complementary strengths. A General Electric Company paper has predicted the industrial internet will add US$15 trillion to the US economy. China also ushered its "Made in China 2025" strategy in March this year to upgrade the manufacturing sector. If the two strategies could be connected, such as China’s big manufacturers forming an industrial internet alliance with General Electric, this will help both countries' economic strength. China and the US could work to adopt common norms and standards for the digitization and networking of industrial processes.

Secondly, China and the US can pursue cooperation in financial supervision. The US has the most technical expertise in how to protect consumer interest, how to improve efficiency of supervision, how to regulate fast-growing Internet finance while pledging to support the sector through financing for small businesses and entrepreneurs. The US has the most technical expertise in ways to encounter a crisis using non-traditional tools and China can benefit from all these successful experiences. China and the US could consider signing related Memorandums of Understanding of Cooperation.

Furthermore, although the US was the creator of post-war rules and institutions, the US cannot alone handle the complicated global situation in the post-global economic crisis era. Enhancing international financial regulatory cooperation could also be a new area for cooperation.

Finally, the China and US governments could encourage more academic exchanges. From the newest US economic recovery, we can see the financial service sector is increasingly involved with the real economy. The China and US governments may think about encouraging academia to build joint workshops researching how we can better explain and measure this new economy in the post-global economic crisis era.

 

( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

 

 

Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

 

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