Wednesday 4 April 2012

CHINA’S DOMESTIC IMBALANCE

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CHINA BESET BY INTERNAL IMBALANCE

Martin Wolf

The Irish Times, April 4, 2012

ECONOMIC COMMENT: CHINA’S ECONOMY is changing. Indeed, it has to change, as I argued two weeks ago. The good news is the scale of the external rebalancing. The bad news is that this is at the cost of larger internal imbalances.

China’s balance of payments has been on a rollercoaster. Thus, between 2003 and 2007, the current account surplus rose from 2.8 per cent to 10.1 per cent of gross domestic product. The surplus then fell sharply, to 2.9 per cent, by 2011. Over the same period, the share of exports and imports in GDP exploded upwards and then fell once again.

In orthodox theory, the level of current account surpluses and deficits reflect voluntary decisions to save and invest – countries with surplus savings, such as China, export capital while countries with a deficit import it. Surplus countries enjoy a higher return on savings; deficit countries enjoy a lower cost of investment. Everything is for the best in the best of all possible worlds. It seems peculiar that a poor country exports capital to rich ones, as China has done, but there is no reason, in this view, to question the wisdom of the underlying choices.

Unfortunately, this Panglossian view is hardly plausible after the repeated shocks in international finance over the past three decades, which culminated with the crisis in high-income countries that broke out in 2007.

The US, in particular, proved incapable of using its capital inflows wisely – they financed fiscal deficits and the construction of unneeded houses. Of course, the US is largely to blame for such a sad outcome, as are other capital importers. But large external deficits also have a contractionary impact on demand. This did not seem to matter when the latter was strong. It matters a great deal now, when it is weak.

(...) [artículo aquí]

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