Here's how it looks from China:
Krugman accused China of "engaging in massive capital export - artificially creating a huge deficit in China's capital account". China is running a current account surplus with the US, which by definition means that China is exporting capital to the US. In my view, the most important reason why China should not run a current account surplus consistently against the US is simply because China is one of the poorest countries in the world, and should not engaging in financing the consumption binge of the richest country in the world.
China is running "twin surpluses" - current and capital account surpluses. It means that while importing capital in the form of FDI and foreign debts with high costs, it exports capital in the form of piling up greenbacks and US treasuries with low yields or no yields at all. By doing so, China has been engaging in a massive wealth transfer to the US. How could Krugman argue that China is "making everyone else poorer"?
The losses incurred in financial transactions between China and the US could be trivial compared with the capital losses China may suffer in the future. China has parked its savings in the US treasures while US fiscal debt ratio has been surging. Following the upcoming structural changes such as aging, China will run down its foreign exchange reserves sooner or later. A very big question for China is: When it needs to redeem its treasuries, can America honor its debt obligations?
History may show that China is the biggest victim of the post-Bretton Woods international monetary system, a system of the dollar standard. Under this system, everything hinges on the integrity of the American government and the Fed, or the speed of their printing press. The American government and the Fed have let down those who have trust in them.
For its own sake, China should stop further piling up greenbacks massively.
Yu Yongding, president of the China Society for World Economics.
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