Of China, America and the new global economic relationships
Post 2008 global meltdown, China and America have emerged as two different economic entities. Even though the global imbalances that characterized the world economy in the years before the 2008 crisis have substantially dissipated. While as it is true that China’s current account surpluses and Americas deficits have somewhat moderated since then, the imbalances perhaps have never really been corrected. The post crisis global economy can perhaps not enjoy both growth and balance simultaneously.
The current account of an economy denotes the difference between its investment rate and its savings rate. Just one year before the crisis the US had a saving rate of 14.6% of the Gross domestic product (GDP), but an investment rate of 19.6%, thereby generating a current account deficit. In contrast China which had a fixed investment rate of 41.7% of GDP and a saving rate of 51.9%, resulting in a large surplus. Since then the US current account deficit has narrowed, not because of a higher saving rate but by a collapse in investment activity. The United States overall savings rate has fallen below 13% of GDP owing to worsening of Govt. finances. At the same time China’s saving rate continues to stay high. The surplus has narrowed due to even more rise in investment to almost about 49% of GDP. It implies that even now, Americans save less than they did before the Crisis; and the Chinese invest even more.
The US economy’s attempt to recovery will trigger a revival in investment activity. Their businesses have postponed much needed capital spending; American airports and bridges being in appalling condition as per the developed country standards. Therefore investment in infrastructure is vital. Certainly reviving growth will lead to larger current account deficits even if the saving rate of the US improves and even if Americans can improve domestic energy production to curtail oil imports.
For China things are not similar, to sustain growth, it needs to continue to invest half of its $9 trillion annual GDP, which is not an easy task for a country which already has brand new infrastructure, be it highways or airports. Globalization forced India to become a kind of a Trading Economy, but for China, it became a manufacturing Economy. China in the coming times attempts to move into services and adjust to a shrinking workforce, which may most likely lead to the investment rate to fall sharply.
By increased savings and reduced investment scenario, China will never want to get into a situation like Japan is in -facing the situation of deflation. Post crisis global economy hence will be characterized by huge macroeconomic imbalances, which may take decades together to get corrected.
Consequently China will soon return to running very large current account surpluses, potentially large enough to fund the US, with maybe something still left over for the rest of the world.. For that reason China has the potential to transform from “Factory of the World” to “Investor to the world”.
Lastupdate on : Mon, 25 Mar 2013 21:30:00 Makkah time
Lastupdate on : Mon, 25 Mar 2013 18:30:00 GMT
Lastupdate on : Tue, 26 Mar 2013 00:00:00 IST
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