COULD CHINA'S ECONOMIC POLICIES TRIGGER ANOTHER CRISIS?
Bill Powell
Time, November 3, 2009
Just before the global financial crisis exploded, the conference halls in China were alive with the rhetoric of economic reform. Hardly a week went by without some think tank or ministry in Beijing toasting the 30th anniversary of China's great opening to the world and outlining what the next phase of China's historic development would entail. At a time when experts and policymakers everywhere were decrying "global economic imbalances," China would do its bit to rectify them.
That meant attacking the problem at the root. Just as the U.S. saved too little while consuming too much, China saved too much and consumed too little. The result was a lopsided international trade scorecard. China ran huge current account surpluses — peaking at 10% of GDP in the first half of 2008 — and as a result accumulated a massive load of foreign exchange, which it turned around and loaned, mostly, to the U.S. Government, which enabled Americans to go on borrowing and spending. China, policymakers said, intended to break this unhealthy cycle.
Then a not so funny thing happened on the way to rebalancing: the worst crisis since the Great Depression. The Chinese response to sharp declines in manufacturing and exports has been cheered for its effectiveness. Government stimulus spending and loose credit powered the country's economy to an 8.9% growth rate in the third quarter, and the most recent Purchasing Manager's Index (PMI), a widely watched gauge of economic sentiment released on Oct. 30, rose for the eighth straight month. It now shows "sustained expansion in industrial activity," says Jing Ulrich, managing director at JP Morgan in Hong Kong. At the same time, the U.S.-China economic relationship is not as lopsided as it was a year ago, at least by some measures. The U.S. savings rate has increased to about 4% of GDP (from zero at the recession's onset), and China's current account surplus has fallen from 10% to about 6.5% of GDP. Both are improving for the same reason: shell-shocked consumers in the U.S., where the unemployment rate is 9.8% and rising, have snapped their wallets shut. Now that it's pouring, they have started saving for a rainy day.
Bill Powell
Time, November 3, 2009
Just before the global financial crisis exploded, the conference halls in China were alive with the rhetoric of economic reform. Hardly a week went by without some think tank or ministry in Beijing toasting the 30th anniversary of China's great opening to the world and outlining what the next phase of China's historic development would entail. At a time when experts and policymakers everywhere were decrying "global economic imbalances," China would do its bit to rectify them.
That meant attacking the problem at the root. Just as the U.S. saved too little while consuming too much, China saved too much and consumed too little. The result was a lopsided international trade scorecard. China ran huge current account surpluses — peaking at 10% of GDP in the first half of 2008 — and as a result accumulated a massive load of foreign exchange, which it turned around and loaned, mostly, to the U.S. Government, which enabled Americans to go on borrowing and spending. China, policymakers said, intended to break this unhealthy cycle.
Then a not so funny thing happened on the way to rebalancing: the worst crisis since the Great Depression. The Chinese response to sharp declines in manufacturing and exports has been cheered for its effectiveness. Government stimulus spending and loose credit powered the country's economy to an 8.9% growth rate in the third quarter, and the most recent Purchasing Manager's Index (PMI), a widely watched gauge of economic sentiment released on Oct. 30, rose for the eighth straight month. It now shows "sustained expansion in industrial activity," says Jing Ulrich, managing director at JP Morgan in Hong Kong. At the same time, the U.S.-China economic relationship is not as lopsided as it was a year ago, at least by some measures. The U.S. savings rate has increased to about 4% of GDP (from zero at the recession's onset), and China's current account surplus has fallen from 10% to about 6.5% of GDP. Both are improving for the same reason: shell-shocked consumers in the U.S., where the unemployment rate is 9.8% and rising, have snapped their wallets shut. Now that it's pouring, they have started saving for a rainy day.
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