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Balance of Payments Affects on India and China

A country balance of payment means the record of transaction between foreign residents and its resident over a specified time (Fieleke, 1976). Balance of payment composes with capital account, current account, statistical discrepancy, and official reserve account. There are all exports and imports of goods and services in current account. The transaction also includes financial capital and financial transfer, a country will running a trade deficit when the debits exceed the credits. On the other hands, if the credits exceed the debits, then a country is running a trade surplus. Besides that, foreign direct investment (FDI), Portfolio investment, and other investment include in capital account. This account will measure the difference between home country sales of asset to foreigners and home country purchases of foreign assets. Furthermore, Statistical discrepancy means some miss recorded and omissions between country transactions. Moreover, Official reserve account contain assets such as Gold, foreign currencies, and reserve position in IMF. According to Chandra (1999), Balance of payment affects China through China FDI policy. The policy has given Foreign Invested Enterprise (FIE) to become the important force in China foreign trade development. FIE enterprises have been able to keep their foreign exchange balance with surplus in foreign trade. All these factors have help to the improvement of china balance of payment and the increase of china foreign exchange reserves. The trade behavior of FIE enterprises and the size of FDI inflows was the two factors to maintain the balance of payment. The export growth rate of FIE enterprises exports has resulted surplus for FIE enterprises in general. Besides that, FIE enterprises account for half percentage growth of

China export since eighty. China may able to maintain balance of payment depend on FIE enterprises. Large FDI inflows will absorbed through expanded export from FIE enterprises. Furthermore, balance of payment affects on India and China total exports production and net effect employment (KOKKO, 2006). This connected to a shift production structure, which labor intensive activities are outsourced to host countries with lower wage levels, and more high level operations are kept at home. Most home countries stimulate outside investment, but the fear for negative effect on balance of payments has a time interest restriction on FDI. The balance of payment effects with existing capital outflows to finance the foreign investment project and after inflows of capital in the content of repatriate profits. There is a way to avoid negative on balance of payment such as restriction. The restrictions on domestic borrow to finance FDI in China and India. The reason was to keep the ability to stop investment plan that might have negative impact on home country without having a general ban on outside investment. Moreover, balance of payment affects the China and India international capital market. There is no treat to home country export from outward investment. Besides that, increases balance of payment surplus has give negative impact to china economy (Zhang, 2004). One of the negative impacts is great appreciation pressure on RMB. It became controversial issues about IMF and other countries want china revalued the RMB in international policy circles. Conflict have rise between China and its trading partners and weakened the negotiation between them. It is clear that any nominal exchange rate determine by the supply and of foreign exchange market. Furthermore, the opportunity cost of foreign reserve is rising significantly. China has increase foreign exchange reserve higher than optimal level according to general standard. Its mean the resource have not been be efficiently used. China still attracting all kind of private foreign capital and most of it became part of foreign

reserve. China credit and investment expansion has greatly moved. The deflation that has lasted for years is going missing and the price some products have been raising quickly. Its also made the price of some material increase even more quickly. Deficit balance of payment has affect India economy (Johri & Miller, 2002). It causes the value of rupee from the international market and India become depreciates. The Government cannot borrow money due deficit budget. Therefore inflation has increase import and decrease export. The country was aided by the international community and much better. The international aid had been cut off due not to liberalize on trade. Besides that, balance of payment crisis due to India restriction on international trade. Furthermore, this crisis was caused by a current account deficit which makes India lowering its foreign exchange reserve. The large current account deficit was largely a result of the second and five year plan which mandated higher import, especially capital goods. Export in the year decrease while imports increased from previous year. Another factor behind the current account deficit was the increase in freight costs due to hostilities in west Asia. India no explicitly devalue rupee but instead accomplish devaluation by imposing quantitative restriction on trade rather than imposing higher tariff. The household saving rate in India quite high, most of the blame for India balance of payment problems must rest with the government for its unable to control own spending.

References Norman S. Fieleke (1976). Federal Reserve Bank of Boston. N.K.Chandra (1999).FDI and Domestic Economy: Neoliberals in China. Ari Kokko (2006). The Home Country Effect of FDI in Developed country Liqing Zhang (2004). Copying with China Balance of Payments Surplus: Why and How? Devika Johri & Mark Miller(2002). Devaluation of The Rupee : Tale of two years 1966 and 1991.