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Macroreview: The Need to Rebalance both the Chinese and U.S. Economies

08-04 14:46 Caijing

China's economy is recovering due to proactive fiscal and monetary polices while the U.S. economy is trying to recover primarily through structural adjustments. Like the United States, China should adjust its economy actively, rather than passively.

By Shen Minggao

(Caijing.com.cn) Both China and the United States need to adjust their economies. The country which adjusts first will be better prepared for economic recovery and sustainable growth and have an upper hand in future bilateral economic dialogue. 

During the recently-concluded Strategic and Economic Dialogue (S&ED), the United States emphasized balanced and sustained economic growth. The United States also proposed new energy as part of the strategy to combat climate change and a new engine for economic growth. China stressed its enormous potential as a growing market during its ongoing process of industrialization and urbanization. China said that the restructuring of its economy will ensure a continued economic recovery. China also requested the United States to recognize its status as a market economy, apparently to strengthen their bilateral trade, a major contributor to China's growth.

In terms of the effect of economic stimulus packages, China's has worked better so far. China's gross domestic product (GDP) accelerated to 7.9 percent in the second quarter of 2009 from 6.1 percent in the first quarter. It is almost certain that China will achieve an 8 percent GDP growth this year while the U.S. economy may not grow positively until the second half of the year.

However, during the S&ED the United States highlighted signs of healthy economic adjustments. For example, the savings rate for U.S. residents climbed to over 7 percent in June and will likely reach 10 percent in the future. The United States has done better than China in terms of these adjustments. China has to change its current exports-driven growth mode because a U.S. recovery does not necessarily boost consumption, given the soaring saving rates.

In response, China expressed concerns about the U.S. dollar depreciation and hopes that developed countries will take more responsibility in cutting green house gas emissions.

To some extent, the global financial and economic crisis has already improved the trade imbalance between the two countries. The U.S. trade deficit in goods fell from its peak in July 2008 of 90.2 billion dollars to 40 billion dollars in February 2009. In May 2009, the deficit fell by 60 percent from July 2008, or by 52.2 percent year-on-year.

Meanwhile, China's goods surplus with the United States has been knocked off from its peak of 40.09 billion dollars, posted in November 2008. The surplus has been barely 20 billion dollars since February 2009. The figure plummeted about 66 percent in May compared with November 2008, or about 33 percent year-on-year. The surplus was further narrowed to 8.34 billion dollars in June.

The change in the bilateral trade is in the interest of the United States. It has reduced America's reliance on China for the financing of its budget deficit and the pressure to greatly depreciate the dollar. For China, the change has helped decrease pressures from the United States to appreciate the yuan. U.S. protectionists would lose fodder to attack China. In the end, China's share in the foreign markets will be maintained.

The financial crisis decreased the wealth possessed by American households, but its impact on consumption has been far less than expected. According to the U.S. Federal Reserve statistics, total net wealth for American households shrank by 12.2 trillion dollars at the end of the first quarter in 2009. Meanwhile, the total household debt dropped by merely 200 billion dollars to about 14 trillion dollars.

The wealth decrease for American households did not shake the foundations of consumption.  Though the recession led to negative consumption growth, the largest year-on-year decline was only 4.4 percent, recorded in the last quarter of 2008. It was far less than the 8.9 percent drop during the late 1970s oil crisis. 

However, it is uncertain whether deleverage of household balance sheets and rising savings rates are a one-time thing or a permanent change. As U.S. financial regulators tighten systemic risk supervision and easy lending becomes no longer available, American consumers have to rely on savings rather than borrowing to spend.
So far, it looks like U.S. consumption sneezed, making China's exports catch a bad cold. In the first half of 2009, China's exports dropped by 21.8 percent year-on-year. In the second half, China's exports may improve, but it is hard to return to the good old days.

Although China's trade surplus has been reduced, the inflow of foreign capital may partly offset the decrease. In the end, the yuan will still face pressures to appreciate. The Fed will most likely maintain its loose monetary policy if the U.S. economy is sluggish. Instead of buying Treasury bonds, American households may look for alternatives with higher returns. As China's economy leads the world recovery, its asset markets have become increasingly more attractive to foreign capital. Hot money will worsen China's already excess liquidity. China's recent fast growth in foreign reserves also testifies to the inflow of foreign capital.

As the U.S. federal government and state governments face high deficits, it is imperative for consumers to save more, so the government can finance the development of new energy and low-carbon economy and invest in infrastructure at a low financing cost. Actual low consumption is a precondition for an increase in investment. When the U.S. economy corrects its overconsumption, fast growth in investment will lay the groundwork for economic recovery.       

In contrast, China's high saving rates and constant inflows of foreign funding compel the Chinese government to make a hard choice: continue investing in infrastructure or buy Treasury bonds? China will have to suffer additional risks if the dollar depreciates but to continue investing in infrastructure will bring about low efficiency caused by overinvesting.

If China wants to avoid such a dilemma, it must boost domestic consumption. Chinese consumers must lower their savings rates. Meanwhile, the percentage of residents' incomes in the gross national product should be increased greatly. Second, China needs to push for the appreciation of the yuan. Chinese firms have to rely more on domestic markets than overseas markets. Finally, China needs to turn potential consumption into real consumption during its industrialization and urbanization. Only in this way can China become a new engine for global economic growth and gain a bargaining advantage in future U.S.-China negotiations, which is commensurate with China's economic size.  

Shen Minggao is Caijing's chief economist. This article appeared in Caijing's Marcoeconomic Weekly published on August 3.


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