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Rise Of The East
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Subramanian, who is a senior fellow jointly at the Peterson Institute for International Economics and the Center for Global Development, and is travelling through India, was speaking at the Reserve Bank of India.
In his new book titled Eclipse: Living in the Shadow of China's Economic Dominance Subramanian writes about what he calls the 'Index of economic dominance' - which is a factor of a country's GDP, its trade - its power to determine access to the world's markets, and its external financial strength.
Talking to an auditorium full of economists, Subramanian talked about how the IMF actually means "insolvents must fawn" and how creditors all over the world call the shots and debtors have to comply.
China will maintain its growth momentum of about 6.5 per cent per annum for the next 15-20 years while the US will grow at about 2.5 per cent and this broad differential makes China's dominance imminent, he said.
Historic data too, Subramanian said, suggests that the country which dominated the world's trade (UK in the 1800s, US after World War II and till the early 2000s) eventually gave the world its currency as the reserve one.
With the ongoing Eurozone debt crises, it is not US that these countries are turning to as a potential creditor for Europe, but China, he said.
China's undervalued exchange rate has also had a significant negative effect not just on US and Europe, but mostly on other Emerging Market Economies that compete with the Asian giant for trade.
But the fact that despite all these negative forces on currencies, the world has been unable to change China's policies, shows the extent of its dominance, he said.
However, with China's GDP (standards of living) at 20-25 per cent of that of US, and growing only to 40-50 per cent over the next 20 years, China will not be the richest country to be a superpower. More importantly, Subramanian said, eventually it will not be the G7 or G20, but G1, with just China.
China already happens to be the world's largest exporter and will be 50 per cent greater than US's economy based on the GDP or even the PPP (Purchasing Power Parity).
Subramanian's conclusions are clearly contestable, but his arguments are quite persuasive, RBI governor D. Subbarao said.
China's race to the top will be a combined factor of its sheer demography, convergence (that is its scope to catch up) and gravity (that is its trade).
However, in order for the renminbi to become the premier reserve currency, there would have to be three pre requisites, viz: market-determined interest rates, exchange rates and liquid financial markets.
The US dollar overtook the sterling about 10-15 years after the US economy overtook the British one, which historically shows that the lag is only about 15 years.
The People's Bank of China has already been taking small steps to internationalise its currency and slowly global trade, financing and settlement will start happening in renminbi.
During the financial crises of 2008, when Chinese exports collapsed, China had the fiscal wherewithal to counter the shock, Subramanian said.
China has been facing and resisting international pressure to value its currency to correct levels, with many countries saying China's intentionally undervalued renminbi is deeply hurting trade economics for other countries.