China indicated back in the 2004 that it wanted to rebalance its economy, and shift away from export and investment-led growth.
Despite a common perception in the US business community that China’s leadership can do pretty anything (economically speaking) that it wants to do, it is increasingly clear that the policies China has adopted to try to rebalance its economy have not worked.
The World Bank’s most recent quarterly update on China’s economy report notes that net exports will contribute as much to China’s growth in the first half of 2007 as in the last half of 2006:
“The external contribution to growth remained high … Our estimates … suggest that the contribution of net external trade to growth remained at the high level of the second half of 2006, contributing over one-fourth of overall growth” (Figure 1 of the quarterly has the details).
China’s current account surplus is projected to rise to $380b (12% of China’s GDP) – even with very high oil prices. That is an increase of $300b (and 8-9% of China’s GDP) since 2004. If the US had experienced a comparable swing — relative to its GDP — in its current account balance, it would be running a substantial surplus now.
Incredibly, the rise in the current account surplus (an excess of savings relative to investment) has come even in the face of strong investment growth. Sure consumption growth is strong, but consumption is such a small share of GDP that even strong consumption growth contributes less to overall GDP growth than might be expected – especially when consumption is growing more slowly than investment and exports. The World Bank notes that “almost all of the variation in domestic demand growth recently has been driven by investment, including the upturn in the first half.”
The World Bank notes that China’s surplus the “external imbalance remains the main macroeconomic issue” that China faces. China’s steadfast defense of a very modest pace of appreciation against the depreciating dollar influences almost every other aspect of China’s economic policy.
But China’s huge external surplus isn’t just an issue for China. China’s policy choices are shaping how the global economy adjusts to the US slump. That slump – and the associated weakness in the dollar — has already pulled down the US non-oil trade deficit a bit. But the main impact of dollar (and RMB) weakness has been an increase in China’s trade surplus.
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