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China must pay close attention to its trade surpluses with the United States, which could, if the situation continues, lead to an overheated economy, suggests a senior analyst.
"China's economy is in danger of suffering very badly when the US' current account deficit corrects itself, as it obviously must since no country can continue going into debt ... at the rate of US$1 million per minute, or half a trillion US dollars per year, for very long," Richard Duncan, author of "The Dollar Crisis: Causes, Consequences, Cures," told China Business Weekly.
Duncan was in Beijing last week to address a high-profile forum, the China Conference: Making Financial Markets Work. The event was co-sponsored by Euromoney Conferences, HSBC and the Bank of China.
The reason countries with trade surpluses have overheated economies is because their export earnings go into banks as deposits and the rapid expansion of deposits forces banks to issue more loans, Duncan said.
That, he continued, results in asset inflation in stocks and property and over investment in industrial capacity, which leads to excess capacity and deflation.
"I believe this is what happened to Japan in the 1980s and to Thailand and other countries hit by the Asian financial crisis in the 1990s," Duncan said.
According to his theory, the global economy has been destabilized by the US' enormous trade deficit, which exceeds US$50 million per hour, or 1.5 per cent of global GDP (gross domestic product) per annum.
That trade imbalance, financed through debt, has created a tremendous imbalance in the global economy, and an economic bubble in the United States.
When the bubble pops and the global economic imbalance unwinds, the world will not be able to avoid a very serious economic slump, Duncan said.
China's trade surplus with the United States is on track to top US$120 billion this year, approximately 10 per cent of China's GDP, and loan growth in China is expanding more than 20 per cent a year.
Experiences in Japan and Thailand revealed rapid loan growth resulted eventually in a very high ratio of non-performing loans (NPLs).
The NPLs were not apparent while loan growth was high, but became problematic when loan growth slowed. Then it became hard to issue new loans to repay the old ones.
"The same thing is occurring now in South Korea's credit card industry. When consumer lending slowed, credit card companies in South Korea went bust," Duncan said.
"China's banking industry is already disturbing, with its high NPL ratio, which stands at more than 20 per cent on average, and loan growth is still very rapid."
China's trade surplus with the United States is resulting in the rapid growth of deposits and, hence, loan growth, Duncan said.
Fast-increasing loan growth threatens to overheat China's economy, as it did in Japan and Thailand, he added.
The China issue, he said, does not affect only China.
In terms of globalization, he added, the issue is tightly linked with the global economy.
The huge trade imbalance between the United States and most exporting countries began in 1973 when the Bretton Woods international monetary system collapsed, Duncan said.
The US dollar since then has been the world's reserve currency, in place of gold, which had comprised the world's reserve assets under the Bretton Woods system, and under the gold standard during the 19th century.
The current monetary system has allowed the United States to finance extraordinarily large current account deficits by selling debt instruments to its trading partners instead of paying for its imports with gold.
Thus, the age of globalization has been ushered in by allowing exporting countries to sell their products to the United States on credit, Duncan said.
The benefit of the system is that it sparks rapid economic growth, especially in developing countries.
It also helps reduce consumer prices and, therefore, US interest rates, as an increasing number of goods manufactured in exporting countries, with much cheaper labour, are shipped to the United States.
However, as the system continues to function, a number of undesirable and potentially disastrous consequences are emerging.
Countries that stockpile international reserves through trade surpluses tend to experience severe economic overheating.
The United States has also found economic bubbles and hyperinflation in asset prices as its trading partners reinvested their dollar surpluses in US dollar-denominated assets.
Overinvestment has produced excess capacity and deflationary pressure, both of which are undermining corporate profits globally.
Existing trade imbalances cannot persist, Duncan said.
Global demand cannot absorb supply, and prices are falling even as governments increase fiscal spending and money supplies to support aggregate demand, he said.
"The only win-win solution to these trade imbalances is to find a way to introduce steadily rising wages for workers in the export industries of all the developing countries," Duncan said.
"I believe global economic policy-makers should agree to implement a global minimum wage system.
"Lifting the purchasing power of those workers to spark domestic demand-driven growth will replace the strategy of export-led growth."
Wages in developing countries are about 90 per cent less than those in the United States, Duncan said.
Factory workers in developing countries earn up to US$4 per day.
An increase of US$1 per day each year would more than triple workers' wages, to US$14 per day, over a 10-year period, Duncan said.
The plan would not be easy to implement, as any move to make global policy-makers reach an consensus would be difficult, he said.
And it might be too late to implement the idea, as increasing wages in exporting countries must be gradual, he added.
However, the global trade imbalance continues to accelerate.
Minimum wages could be implemented by an international organization, for example, Asia-Pacific Economic Co-operation, or by forming a labour cartel, Duncan suggested.
"If leaders of developing countries believed this strategy would help them, but industrialized countries did not concur, there would be nothing to stop the developing world from forming a labour cartel, just as the oil-producing countries created an oil cartel through OPEC (Organization of Petroleum Exporting Countries)," he said.
"And the creation of OPEC was also not easy at first."
Duncan was excited by the news last month that US presidential candidate Dick Gephardt was advocating a similar plan.
"I had never heard anyone else suggest that. I believe it is the right way forward, and perhaps the only way to achieve stability and prosperity in the global economy in the 21st century," Duncan said. | 
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