In my last entry I tried to set out the necessary shifts over the next few years as the world, and especially China and the US, works out its imbalances. These shifts will take place, I am pretty sure, but they can do so under a “good” scenario and a “bad” scenario.
So what does all this have to do with the SED? It means that the best hope for the two countries, I think, is a well coordinated set of policies acknowledging that the US savings rate must rise, and with it the Chinese must decline, but also recognizing that if this happens too quickly, or is accompanied by a collapse in trade, it will be bad for the US and terrible for China. These coordinated policies must also acknowledge – and this becomes much more difficult – that the current Chinese stimulus may be making the adjustment more difficult, and much of it will have to reversed at the same time as the “appropriate” measures aimed at spurring consumption may cause a short-term rise in unemployment.
Finally, the while the US commits to keep fiscal spending high, to turn a blind eye to trade disputes, and to run large trade deficits for several years more, China must commit to the financial sector and currency liberalization that will effectively reduce subsidies to producers and constraints on consumption. The SED might also discuss the ability of workers to demand and enforce wage increases, since there is a wide consensus in China and abroad that among the main reasons for low household consumption in China is that wages are rising too slowly relative to GDP, and household savings are “taxed’ too heavily via interest rate policies. Of course discussing workers right in a bilateral context is politically difficult, even without the irony of this particular discussion, so it will probably not happen.
When I discuss these issues, I am often confronted by the “aha!” crowd who point out that my analysis must be wrong because if China does what I think they should do that would cause a rise in unemployment. How can a policy be the right one if its implementation leads to a bad outcome?
That’s easy. It can be the right policy if the alternative leads to a worse outcome. That’s the problem. There is no silver bullet here that can kill all the demons and leave us living happily ever after. As I see it, the imbalances of the past decade were real and must be addressed, and we have broadly speaking three possible ranges of outcomes:
1. The US returns to its consumption orgy, the US trade deficit surges, and we’re back to the wonderful days of 2005. China can continue pumping out production and funding US consumption. The problem of course is that this cannot be a permanent solution. It just postpones the resolution of the global imbalances while fueling another asset bubble and saddling the US with even more debt and China with even more excess capacity.
2. China begins a long – five or six years at least – process of forcing the necessary structural changes that will permit a shift from a production-led economy to a consumption-led economy. The changes necessary involve liberalizing interest rates and the banking system, allowing workers higher wages, and a number of other measures to boost SMEs, the service sector, and household consumption. In the short term, however, nearly all of these measures will involve closing down unprofitable production facilities. This must be done in conjunction with the US, so that the US adjustment is slowed down to a pace which China can absorb. The US would do this by keeping fiscal expansion high enough to counteract the contraction in US household consumption.
3. Everyone does what they want to do anyway with no attempt at serious coordination. US savings rise. Chinese production rises too. These two forces are globally incompatible and eventually lead to a sharp contraction in global GDP growth. The effects on China might include, but are not limited to, an explosion in Chinese inventory, a sharp and nasty contraction in international trade, or a brutal rise in Chinese NPLs and an unsustainable government debt burden.
High savings in China is not an accident. Chinese trade and industrial policies that were aimed at generating employment growth by directly or indirectly subsidizing the cost of production, including currency and interest rate policies, nearly all effectively created forms of income and consumption taxes that constrain consumption even as they boost production (and a rising savings rates just means that production is growing faster than consumption), and to remove the latter you need to remove the former too.
It’s not so easy to increase consumption
So they have a dilemma: Remove the producer subsidies so as to allow consumption to grow, but cause subsidized producers to go out of business. Or keep them in place, and perpetuate the production/consumption imbalance.
One way or the other Chinese policymakers are destined to be “successful” in raising the consumption share of GDP, because as the US reverses its earlier relationship between consumption growth and production growth, the rest of the world, which ran the opposite position, must also ultimately reverse.
Now for the next few years China’s savings rate will almost certainly decline and its consumption rate rise – it has no other choice except to inflate a major, debt-fueled overinvestment boom – but will that happen because of high growth in consumption or low production growth? That is where policy matters very much, and the longer they wait to address the imbalance, the worse the outcome gets, I think.
Clearly Beijing wants to raise consumption quickly. Not too long ago a group government economists were reported to have reported on their website (sorry, but I lost the link): “The new policy measures and initiatives will be the latest effort to shift growth from focusing on capital investment to a more sustainable model that gives domestic consumption a more important role in boosting economic growth.”
But they’ve been wanting to do this for a several years – as they explicitly acknowledge by calling this the “latest” effort – but the fact that it is harder to this now then it might have been three or four years ago doesn’t inspire me with much confidence. It seems to me that most policies that will boost consumption in a stable and efficient way fall into one of two camps. Measures like building the medical and social safety net, gradually getting banks to direct lending to service industries, loosening the one child policy, and so on can be very successful, but will take years before they have much impact on real consumption.
In that camp I might add measures to force banks to increase consumer lending, because I think the last time they tried that (with car loans), nearly half the loans went NPL, suggesting that at first consumer lending will simply consist of free consumption financed indirectly by the government, when it bails out the NPLs. This is a form of “consumption” I guess, but it is not really what the doctor had ordered.
Bad or worse
On the other hand reversing the policies that might have repressed consumption in the past will probably work more effectively within a shorter time horizon. These would include liberalizing interest rates and allowing them to rise (which reverses the implicit transfer from households to producers), allowing workers to organize to demand higher wages, raising the value of the RMB, and so on. Unfortunately nearly all of these measures would hurt manufacturers, especially in the export sector, and would cause an initial rise in unemployment. I am not sure it is possible to manage the transition without a sharp, short-term rise in unemployment caused by the downsizing of the export sector as its implicit subsidies are removed, and it isn’t clear to me that any country that has managed a similar transition has been able to avoid this. My guess is China will have to do this, but will wait until they have no choice – building up in the mean time even more excess capacity and bad debt. And bad debt, as I have argued before, must be resolved at some point in the future, and unfortunately usually in a way that constrains consumption growth.
One of the things that worries me is that the trajectory of rising US savings and increased investment in Chinese production is likely to squeeze the tradable goods sector in most countries around the world as China increase its market share. This will lead to accusations that China is behaving in a predatory way, and will almost certainly lead to increased trade tensions as policymakers around the world try to protect their tradable goods sectors form “unfair” Chinese competition.
But I don’t believe that China should be considered predatory. China desperately wants to raise its consumption rate, because it is highly likely that for the next few years Chinese GDP growth will be limited to something below Chinese consumption growth. Beijing would love to find the magic policy that transforms Chinese consumption overnight and turns China into a continental economy driven by internal demand. It would love to see the trade surplus reduced not by a collapse in exports but rather by a shifting of exports to domestic consumption and a rise in imports (this last maybe).
The problem is that there is no such magic policy. I cannot find any historical precedent of a country that was able to make the transition quickly and painlessly, and because of its own domestic problems – especially the employment effect of the contraction in the export sector – China is facing a difficult set of policy choices. The fact that the fiscal stimulus may be exacerbating China’s reliance on the export sector was not the plan. The fiscal stimulus is aimed at arresting a sharp and probably politically unacceptable rise in unemployment, and the fact that so much spending has gone into investment, rather than consumption, reflects rigidities in the economic and financial structure. China would love to see explosive growth in domestic consumption, but there is no way they can easily engineer such growth.
So we are stuck with policymakers, in China and elsewhere, making the best of a bad situation. They can be criticized for not beginning the adjustment process when conditions were much easier, but that is a criticism that can be spread around pretty thickly to policymakers in quite a few countries. Anyway it is too late.
In these circumstances policy coordination matters a lot, and I see too little of it to have much optimism. Beijing, Washington and Brussels must recognize that China and the world is still in a more vulnerable position than anyone seems to realize, and that rising US savings and rising Chinese investment create conditions for two seemingly irresistible forces to go head to head, and without coordination the consequences could be much worse than we expect.
[...] Read the rest of this great post here [...]
[...] More: What should have been discussed during the SED meetings (Part 2) [...]
Michael,
What about raising public sector (and SOE) salaries and pension payments? And is there an opportunity to get credit cards into the hands of middle class consumers? In Mexico, just before the maxi-deval, talk was that they were handing out credit card apps on street corners. Finally, are there other consumer credit channels that could be “stoked”? The 1920′s U.S. bubble was fueled by something as simple as the widespread adoption of installment credit for consumer durables. I’m not sure what kind of downpayments Chinese consumers have to put down on cars, washing machines, refrigerators, etc, but I’d imagine lowering those would have a pretty immediate impact.
Dr. Pettis,
First time posting a comment here, but I love your work and regularly read your blog. Thanks for writing it. I wish I had known about you while I was still living in Beijing as I would have definitely bought you a drink at one of Beijing’s music scenes!
Just a quick note: I think your three outcomes above are a good way to frame the current situation, but a bit off too. Outcome #1 is unrealistic as the credit/debt mechanism has been badly damaged here in the US and a massive deleveraging process is currently underway. This will supress consumption for over a decade, at least. So, an ‘orgy of spending like 2005′ is not coming back. Outcome #1 is not thus not possible.
I also do not think outcome #3 is quite right. Uncoordinated policy responses, including increased US savings and increased Chinese production will result in high unemployment in both countries, as Chinese capacity investment leads to higher inventories and then deflation. These lower prices push down world prices and US firms cannot compete, leading to closure and unemployment. Since US consumption is not coming back anytime soon, all #3 really does is disastrously increase unemployment in both countries and that is something I think China’s leaders will try and avoid at all costs.
So, as I see it, the only realistic outcome is #2, which I think you have got correctly. Of course the first step for #2 should be to let the RMB float… That would help a lot with global economic imbalances, as a lot of other Asian producing countries try to maintain their competitiveness vis-a-vis China.
Cheers,
Moruobai
I think it will be very difficult to get China to deal with its external surpluses. The mindset is that even if policy makers can boost private consumption, that the economy should be able to run large surpluses in equilibrium. This insular thinking equates to over-emphasis on internal equilibrium, rather than on balanced growth. Ask any policy maker if they are OK with a situation where the country is not running a large surplus, and they get antsy. Maybe tiny economies like Hong Kong and Singapore can do this, but look at Japan and we see the consequences of this kind of thinking. We are still talking about policy in China in the orthodox lexicon, and despite the fact that many very knowledgeable officials studied such things in great detail, it doesn’t mean that they see the world like your typical western economist. Japan was too small, and its rise to short-lived to force us to accept this, but the reality today is that we have to acknowledge the fact that official China does not see the world the same way as most others. That is why they are still running de facto import substitution policies for large capital goods that the rest of the world is very good at making – high-speed trains, the big airplane project, the auto industry – all of the pillars that they equate with national strength. For the time being they are content with either inferior infrastructure, to requisition the intellectual property of their partners once it is transferred (trains, aviation), and generally to maintain as many barriers as possible – and use them to compel cooperation – until the time when China can make the stuff it needs for itself. External policy making is interest based; internal policy making is closer to foreign analytical frameworks.
[...] Overproduction is a problem ???? Filed under: china, finance — twofish @ 12:55 am http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-2/ [...]
Does anyone know how much influence Governor Zhou has in forming future fiscal policy. If Zhou, King (BOE) and Bernanke are listened to than I think the global re-balancing act will be fairly efficient. Unfortunately, I don’t think the other Chinese leaders that are directly in charge of fiscal policy are as adept to making the needed changes as is Governor Zhou.
It will be interesting to see how China manages the transition, for it seems likely that they will be experiencing a fair bit of social unrest (something I’ve been half expecting in the US also — one wonders how the Japanese managed to accomplish their late 80′s transition with out major unrest). This is all going to make this transition not only economically difficult, but socially and politically difficult (with all the social adjustments) as well.
This does not augur well for a graceful local or world wide adjustment.
I often argue that the challenge of boosting consumption in a non-democratic country does not depend on whether or not that country’s leaders are able to enact policies targeted at achieving the aforementioned goal; in my view, boosting consumption is rather a matter of (un)willingness.
If we look at the course of world history, it is evident that by and large, most industrialized countries have an economy in which domestic consumption constitutes a significant share of GDP. Incidentally(?), virtually all of these countries have managed to establish a democracy-like system. But they did so in the past, when societies across the whole world were not only concerned about money. It is hard for me to see how exactly they had been able to do this, but they did accomplish it.
Today, the world has changed. Today, only capitalism and money rule. The upper class of today would never tolerate a loss in purchasing power relative to the lower class. But raising wages would have exactly this effect. Why was corruption less widespread in China from the 1950s to the 1970s? Because there was nothing to steal; the country was destitutely poor, and only Mao and his closest intimates were somewhat richer than the rest in China. Btw, this problem applies to all non-democratic countries/economies. Just look at most African countries…how the hell do you want to narrow the gap between rich and poor and boost consumption there?
The final question would be, don’t the Chinese leaders realize that China as a whole would be worse off relative to other countries in the world absent the necessary structural changes in China? Of course they know this, but they’re still superior relative to the rest of the Chinese population. And for them, this is what matters to maintain their luxurious lifestyle based on sucking the sweat and money from ordinary Chinese people.
Sorry for a posting of non-economic nature, but I really see no likeliness that Chinese leaders (especially the regional ones) will allow salaries and wages of ordinary citizens to rise relative to the money they themselves are able to steal by means of corruption. Assuming the size of the cake is fixed: If you give your people a larger piece of it, you need to content yourself with a smaller piece. So the key question that remains is: What if the benefit for the corrupt leaders if they make ordinary citizens richer?
If the combined long term growth of both the US and Chinese economies is the goal, then I’d agree with your basic premise (that we should be working toward sustainability and a steady reduction of the trade imbalances).
However, I see only China working toward long term growth. The US is focused on sustaining consumption and protecting corporate profits. Cooperation along these goals leads toward a continued trade imbalance, which is why we see the RMB still pegged firmly to the dollar, even as the dollar declines against other currencies.
I believe China sees the US as a competitor more than as a partner. China continues to become more competitive as it develops new businesses and industries, keeping the workforce busy building for the future. Meanwhile the US runs up huge deficits as it tries to prop up the housing market and protect the banking sector as companies continue to downsize for higher profitability.
As long as this continues, China grows stronger and the US weaker. This suits China’s long term interests well and benefits US executives and politicians, so change is not likely to be voluntary.
This is a very good summary of the situation.
“One of the things that worries me is that the trajectory of rising US savings and increased investment in Chinese production is likely to squeeze the tradable goods sector in most countries around the world as China increase its market share. This will lead to accusations that China is behaving in a predatory way, and will almost certainly lead to increased trade tensions as policymakers around the world try to protect their tradable goods sectors form “unfair” Chinese competition.”
Important point #1: Global trade imbalances are getting worse, NOT better. The crisis is not over because the causes of the crisis have not gone away. China increasing production when the US consumer is pulling back is the exact wrong strategy and will result in an even greater blow up. Nobody is willing to take short term pain for long term gain. Long term will be a disaster.
Important point #2: The trade wars are just beginning. When it becomes apparent that the previous level of trade was not sustainable and economic output stagnates, politicians will look for scapegoats and the easiest scapegoats are those who don’t vote (foreigners). China is an obvious target but you have even seen trade tensions develop between the US and Canada over the “buy American” clause in the US stimulus.
Would # 2 be equivalent to Japan style stagflation?
The publication today of China’s July trade figures shows that the second key factual plank Michael Pettis has argued regarding China and the world economy is wrong. This is the claim made in the Financial Times that ‘although Chinese exports have dropped, imports have declined even faster’. Such a trend would mean that China’s trade surplus was expanding when in fact it has shrunk rapidly.
The figures show China’s trade surplus in July was $10.6 billion – a fall of 54% compared to the same month in 2008.
This drop precisely reflected a continuing trend whereby China’s imports have declined much less rapidly under the impact of the financial crisis than its exports. In terms of year on year changes China’s exports have fallen 23.0% while its imports have only fallen by 14.9%. This is the exact opposite of Michael Pettis statement made in the Financial Times.
There was a small month on month increase in China’s surplus compared to June’s $8.3 billion, but this was well within the range of expected monthly variations and the 3 month moving average of the surplus declined sharply from $17.3 billion in June to $12.5 billion in July. Unfortunately the comments section on this blog does not seem to handle charts as these immediately show the sharply declining trend of China’s trade surplus. I have presented such charts elsewhere for the period right back to 1992 which show very clearly the sharply declining trend in China’s trade surplus this year.
The annualised 3 monthly moving average of China’s trade surplus was $270.2 billion at the time of China’s peak exports in August last year, it rose temporarily under the impact of the financial crisis to a $457.1 billion in January, and is now running at an annualised $150 billion. China’s trade surplus has therefore fallen by almost half from the pre-financial crisis levels.
The inaccuracy of the first plank of the theory Michael Pettis has put forward, the wrong claim that US consumption was falling as a proportion of the US economy, and US saving rising, when in fact the reverse has occurred, has already been dealt with in my comments on the previous post on this blog. I note that neither Michael Pettis, nor anyone supporting his position has come back and presented any refutation of the point that consumption has actually risen as a proportion of GDP in the US under the impact of the financial crisis, and US saving has fallen.
They are unable to do so because the facts are the opposite of those which they claim.
Now the second point of this theory, the claim that China’s imports have been falling more rapidly than its exports, has also been confirmed to be factually wrong.
One of the best quotes attributed to Keynes was ‘When the facts change, I change my mind. What do you do, sir?’ The answer of those defending the factually wrong claims regarding the US and China’s economies appears to be ‘if the facts contradict our theory we ignore them and pretend something else are the facts.’
People may wish to go on defending a theory which is based on wrong statements concerning some of the main trends of the world economy but they are merely deluding themselves by doing so. Others will see perfectly well that no correct theory of either the world economy , or China’s or the US’s role in it, can be built by making claims that are simply factually false.
[...] What should have been discussed during the SED meetings (Part 2) (Source) [...]
Michael, if China is not predatory then what would you call it?
I do agree with you that political decisions will trump doing what is right. On the other hand, the duplication of manufacturing due to trade barriers is an acceptable means to increase employment.
Wait a minute, Ross. You attack Pettis for saying that that as the US trade deficit contracts and consumption growth slows the Chinese trade surplus must also contract, and then you criticize him for saying that the Chinese trade surplus must rise. I think your reading of what he said is totally confused.
ha ha ross, you dolt, instead of trying to attract eyeballs by attaking pettis, setser and wolf you might try reading what they said. let me summarize what pettis has said oh about a dozen times:
1. the chinese fiscal stimulus will at first cause china’s imports to drop faster than exports.
2. the chinese trade surplus will rise at first, and over a longer period will drop much more slowly than the US trade deficit.
3. this will “cause china’s trade competitors to bear most of the brunt of the adjustment,” but
4. this can’t go on for long and eventually the chinese trade surplus will have to decline.
this is exactly what he said would happen. try reading some of his posts.
Glen, I think that the situation is very different from that of Japan because for much of the past two decades the US was growing quickly, and as Pettis would probably stress, its trade deficit was rising. By the way Japn had stagnation and deflation, not inflation.
Professor,
What do you make of the growth in Chinese consumption? Isn’t it already exceeding what you expected?
RodgerRafter,
China probably sees the US as much of a mixture of partner and competitor as the US sees China, and the competitor part is probably political while the partner part is economic. The two economies have very little overlap.
Ross,
Take a deep breath and read what Pettis said many times about the trajectory of the Chinese trade surplus. I think you will find that, once again, you completely misunderstood him, and once again I think on purpose.
John Ross needs to be prescribed some attention deficit disorder meds, he clearly can’t retain focus over more than 1000 words. Great post, we will see how long it is before carbon control as a backdoor to protectionism opens up.
#3.
The political structures of the world are based on the nation states, and really don’t allow the type of inter-governmental cooperation envisioned in #2.
The question is how China will respond to the scenarios presented in #3.
Professor Pettis: Two great posts on world imbalances.
One solution (albeit very difficult) towards reducing US-China imbalances would be big shifts in the tax mix.
In the USA, one of the biggest tax-subsidies is the interest deductability for mortgages on houses and consumer durables. Capping or phasing this subsidy out over the medium-term would raise US savings. Similarly, a big increase in energy taxes and/or the introduction of a National sales or VAT would be helpful. Shifts in the tax mix could be revenue neutral by reducing payroll and income tax.
I would be interested if you have views on how the proposed Health Care reform would affect long-term US savings and competitiveness?
I do not know how China treats interest payments as relatively few pay income tax. But the tax system could surely further encourage rural home ownership and purchase of consumer durables. If all else fails, why not just cut sales, local taxes and social security charges, while phasing out useless subsidies to manufacturing and export rebates.
PS: I admire your tolerance in continuing to post Prof. Ross’ repetitive “sophist” blah, blah.
best regards James
PMJ
I am afraid ‘ha,ha’ doesn’t constitute an argument – rather the fact that you use it shows that you don’t have one.
When arguing a case it is necessary to present some evidence for it – you present absolutely no facts or quotations to support your position that I have misrepresented what Michael Pettis has argued.
I quoted exactly what he wrote in the Financial Times: ‘although Chinese exports have dropped, imports have declined even faster’. I pointed out that the opposite is true and that China’s imports have fallen less rapidly than its exports.
You claim that Professor Pettis has argued:
‘1. the chinese fiscal stimulus will at first cause china’s imports to drop faster than exports.
‘2. the chinese trade surplus will rise at first, and over a longer period will drop much more slowly than the US trade deficit.
‘3. this will “cause china’s trade competitors to bear most of the brunt of the adjustment,” but
‘4. this can’t go on for long and eventually the chinese trade surplus will have to decline.
Let us grant for the moment that your presentation of what Professor Pettis has argued is correct (although I would point out that as usual you don’t cite evidence). But unfortunately this is not what has occurred in the real world – as can be seen by contrasting actual developments to your 4 points.
1. The Chinese stimulus package has not led ‘China’s imports to drop faster than exports’ as you argue. On the contrary China’s imports have fallen significantly less rapidly than its exports.
2. The Chinese trade surplus is not rising ‘at first’ as you state but China’s trade surplus has been falling – and falling rather sharply.
3. As China’s trade surplus is not rising your claim than China’s trade competitors will have to bear the ‘brunt’ of this adjustment is false – as there is no ‘brunt’ to bear.
4. Your claim ‘this can’t go on for long’ does not make any sense as there is nothing to ‘go on for long’ at all – as China’s trade surplus has not been rising but falling.
As I said it is a great pity than the comments section does not technically accept charts as these immediately show the fall in China’s trade surplus this year. But I have graphed the sharply declining trend of China’s trade surplus elsewhere and people can easily verify the actual trend.
I don’t know if Professor Pettis would accept your presentation of his analysis, but if he would all that it would show is that this analysis is not in line with the facts of the world economy and is therefore wrong.
Michael Pettis did claim in the Financial Times precisely as I quoted: ‘although Chinese exports have dropped, imports have declined even faster’ and this statement is not true about a very important fact not only of China’s economy but of the world economy.
I don’t agree with Michael Pettis’s analysis but he is attempting to present a coherent theory of very important issues – which is why they are worth engaging with. These arguments are therefore also capable of being tested for their agreement with actual economic facts and by their internal economic logic. I think it can be shown they are wrong on both counts and therefore this theory, which is also held in somewhat different variants by Martin Wolf and Brad Setser is incorrect.
If you wish to argue this theory is correct you should produce some facts and some arguments to support it – I am afraid ‘ha ha’ reveals you don’t have them.
Mr. Ross, I don’t often comment but I have to say I am very puzzled by your statement. Profesor Pettis has been pretty clear since early 2008 that at first China’s exports were declining more slowly than imports, and he gave the reasons for that, but exactly for those reasons he claimed that this was not sustainable and would soon lead to a situation where imports would drop faster than exports. The fact that this seems to have happened in the past two or three months, after a record busting second half of 2008, is in my mind, and apparently in everyone else’s mind but yours, very strong confirmation of his views. It seems to me that you desperately want to insist that he is wrong, for reasons that have nothing to do with the facts, because otherwise you would simply accept that you have misread him and would congratulate him for being right.
I am sorry to say this, Mr. Ross, but now I know you are being willfully dishonest. After writing my last comment I decided to check the recent FT article that professor Pettis wrote, and over which you have been so insistent, and I see this following passage, which you could not possibly have missed if your intent was other than to make your name by baiting him:
“Although Chinese exports have dropped, imports have declined even faster, so that China’s GDP continues to grow faster than its consumption, and China’s savings level, which is the inverse of consumption, continues to rise. But this has come at the expense of an unsustainable squeeze on China’s export competitors. Eventually, and maybe this is already happening, the decline in the US trade deficit must result in a decline in China’s ability to export the difference between its growth in production and consumption.”
The first sentence can be uncharitably read to mean that exports have declined less than imports in the past two or three months, in which case Pettis is probably wrong (depending on the impact of commodity stockpiling, which he mentions many times elsewhere as you must know), but it is far more likely that he means that this process had occurred after the beginning of the contraction in the US trade deficit in 2007, in which he case he is certainly right. The record busting trade surplus of 2008 H2 is proof. For you to insist on the most uncharitable reading possible of an OpEd piece, which by nature stresses brevity over explanation, suggest intellectual resentment more than intellectual curiousity.
The second sentence, however, makes it very clear that he thinks a growing trade surplus is unsustainable, and that at some point Chinese imports have to contract relative to exports (“and maybe this is already happening”), or else how are we to interpret “a decline in China’s ability to export the difference between its growth in production and consumption”? He is saying very clearly that at some point, and perhaps already, China’s trade surlus has to decline, which is the same as saying that China’s imports have to decline more slowly than China’s exports. There is no other fair way to read this.
For all your protestations, I think you are being dishonest. Now I undestand why Pettis doesn’t try to refute you every time you write. You have no interest in engaging in a real debate and are merely trying to bait him to gain public attention, and he obviously doesn’t want to play that game.
I repeat the question made earlier, I think, by TR. Rather than simply attack well-known scholars dishonestly, why don’t you write your own blog and state what you think will happen to China and why? It is harder to do that than to play these attack games, but it is a more srious way of helping us to develop a real understanding of what China and the world are experiencing.
Yes, but for all his childishness Ross does seem to have at least partially hijacked the much better blog.
Michael,
Brad went to Heaven, so bear with me
“One of the things that worries me is that the trajectory of rising US savings and increased investment in Chinese production is likely to squeeze the tradable goods sector in most countries around the world as China increase its market share. ”
Right, and I do not see a realistic scenario that leads anywhere else, that is, barring political discontinuities of course.
[...] my former prof Michael Pettis’ pieces on the WSJ and in the FT, as well as his related blog posts. I am hoping to continue this as part of a series of conversations with more established opinion [...]
Is there really overcapacity in China? Let’s look at some numbers.
Exports per capita, 2006, US$:
Germany 12,300
Japan 4,210
U. S. 3,110
China 572
http://en.wikipedia.org/wiki/List_of_countries_by_exports_per_capita
————————————————————
Steel production 2008 (million tons):
China 500.5
Japan 118.7
U. S. 91.4
Per capita steel production 2008 (kg)
China 370
Japan 930
U.S. 300
http://en.wikipedia.org/wiki/Steel_production_by_country
Both Japanese and American steel mills are operating at below 70% of their capacities, while Chinese at 100% of their capacities. At the peak of U.S. steel production in 1965, 131 million tons were made, and the per capita production in U.S. was 670 kg. The U.S. imports approximately 40 million tons each year now. So even now, when the boom of U.S. infrastructure building has long past, U.S. still consumes approximately 430 kg per capita per year! I would say that China’s development now resembles the situation in the U.S. in the 1960s, and 370 kg is a far cry from 650 when U.S. was at its peak!
Let’s look at car ownership:
Car ownership per 1000 persons
Germany > 500
U. S. > 400 (> 800 with trucks)
Japan > 400
China 29
http://www.economist.com/daily/chartgallery/displaystory.cfm?story_id=12714391&fsrc=rss
Is the recent increase in Chinese car sales short lived? I doubt.
——————————————————————
Roadways (miles):
Total paved road Expressway
U.S. 2,616,429 46,638
China 979,223 25,484
——————————————————————
Railways (miles):
Total Miles per 1 million people
U.S. 140,840 475
China 47,908 36
——————————————————————-
Paved airports:
Total
U.S. 5,146
China 413
Runway > 3047 m
U.S. 190
China 59
2437 – 3047 m
U.S. 227
China 132
1524 – 2438 m
U.S. 1,464
China 129
914 – 1523 m
U.S. 2,307
China 21
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
U. S. and China have similar sizes, although China is probably more mountainous and needs more tunnel and bridges for its transportation network. China needs a lot concrete and steel for infrastructure, because railways, roads and airports are still lacking in China as the tables above indicates. Like U.S. and Japan in the 50s and 60s, it is much less likely for China to build a “bridge to nowhere” than the U. S. or Japan now in the 2000s.
Re the “Ross vs The Rest” argument: this is a simple case of reading different things in a time-series with ups and downs. The absolute value of the Chinese and US trade balances is declining, and the causes are (1) budget constraints among US consumers and producers in the private sectors (2) attempts on the part of the Chinese Centre to flood the country with funds, thus trying to absorb domestic production capacity, as well as possibly opportunistic stockpiling of raw materials.
That may buy a little time on both sides, but neither country has the political and administrative capacity, let alone political will to cooperate and coordinate, unless in moving the bilateral problem elsewhere.
If that elsewhere is Japan or the EU, that does not look promising. The next generation of Chinese exports competes squarely with what the Europeans and Japan do not want to subcontract to China and that means that the transfer of industrial capacity from Japan and Europe to China may have run its course. That also means that there will be much less advocacy for trade political benevolence towards China in those areas.
And that basically exhausts the range of options prior to a protectionist response. Luckily, it will not happen this or next year, but only after a few years of rising unemployment and deficits, possibly with growing inflation.
Seatrus,
Too many Chinese resort to these false per capita comparisons between China and the rich countries. They are totally meanigless. The fact that China shows low per capita numbers says nothing about imbalances. They only prove that China is poor. Every poor country will show the same low per capita economic numbers. That is what it means to be poor.
And not only is China a very poor country (not even in the top 100 globally per capita), and so should be compared with poor countries, but the comparison itself doesn’t make sense anyway. So what if China exports less per capital than the US? It also exports more per capita then India. What does either statement prove about excess capacity? Excess capacity is a measure of consumption relative to production, and without realizing it you are just trying to prove that poor countries cannot possibly have excess capacity. That is not true.
It would seem that we are at something of the end of an inventory building cycle in China, and assuming the the factories and steel mills will keep running at an acceptable level of capacity, all of the stuff has to head on in containers, or head into inventories. Look at the downside deflationary risks in Japan that are coming out right now, and this would certainly seem to be a downside scenario for China. A lot of back and forth has been based on monthly or quarterly data, but structural issues will take longer to resolve. High capacity and comparatively low consumption would seem to make China’s current account surplus structural.
John T.
I admire your patience in replying to M. Ross.
I believe Ross has his own blog — which probably attracts zilch interest — judging by the quality of his posts (long, confusing and repetitive).
That’s why he spends all his time attacking Setzer, Wolf and Prof. Pettis. My pscyholgist calls it “Jealousy”. regards James
A few fact about China:
If the power conasumption will growth like between 2001-2007 in the next four years, then it will reach the per capita power consumption of Italy.
And two years later,it will reach the level of Japan.
Currently the Coal representing the 80% of the Chinese energy consumption,and this country consuming the 40% of the world coal production.
Source:eia.doe.gov.
http://bomlat.blogspot.com/2009/08/bric-china-energy-consumption-vs-usa-vs.html
here is a few more table.
Glenn,
You argued that the extent of overproduction has to be judged on the base of that country’s personal income and consumption. But how about government spending on public projects, such as roads, railways, airports, power stations, electricity grids, schools, hospitals, low income housing etc, and most importantly, the green technology? There are not that many things overproduced in China based on the aggregate demand (private + public).
Glenn,
Since you mentioned India, I have to say that based on a per capita basis, China is over-exporting compared to many third world countries except oil exporting ones. But China is only #79 on a list of 153 countries, and is far behind industralized countries such as Germany and other EU members, Japan and U.S. etc.
Bomlat,
Here is the Chinese per capita energy consumption (million Btu):
Year 2000/2006
mBtu 29.3/56.2
Based on these numbers, per capita consumption of energy increased approximately 11.5% a year in China from 2000 to 2006.
Now look at the per capita consumption in 2006:
China-Italy-Japan-U.S.
56.2-138.7-178.7-334.6
http://www.eia.doe.gov/emeu/international/energyconsumption.html
Assume Chinese consumption expands at 11.5% a year. It takes China 8.3 years, or not until 2014, before reaching Italy’s level in 2006. It takes China 10.6 years, or not until 2016, before reaching Japan’s level in 2006. And finally, it takes China 16.4 years, or not until 2022, before reaching U.S. level in 2006.
Nemo Incognito, chan-lee james,
While you have been presenting no facts but merely a great deal of abuse bcg81, in a comment on Michael Pettis’s previous post, has redone the calculations on US GDP and shown the figures I presented are correct (his comment was on 11/08/09). I have done a comment there which explains why there is a minor difference between bcg81’s calculations and mine and the statistical reasons for it but bcg81 says themself that the trend (direction and magnitude) is as I stated.
I do not know who bcg81 is, but as someone quite independent of me has redone the calculations and showed the trends are as I stated, that is consumption has been rising as a proportion of US GDP and not falling as Michael Pettis states, do you not think it is time for you to increase your ratio of facts to abuse? In fact, for others reading such comments, it is an almost invariable rule of argument that when someone presents, as they do, a lot of abuse unaccompanied by facts their position is wrong – because if they had any facts they would present them instead of the abuse.
Most importantly the fact that someone independent has verified the figures should lead readers to conclude that the facts are as I presented them and not as Professor Pettis did – that is, consumption has risen as a proportion of US GDP and not fallen, and saving has fallen as a proportion of US GDP and not risen.
The issues Michael Pettis is discussing are extremely important and he has presented an integrated analysis of them – but one which happens to be factually wrong. He has presented claimed facts which he says support his argument and I have presented the evidence, now supported independently by bcg81’s calculations, that shows that the facts he stated are not correct and indeed the reverse of the actual situation. That is a perfectly normal way for a discussion to proceed. Why do you not stop simply presenting abuse unaccompanied by facts and actually address the evidence?
Ross, I seem to writing here more often than I had planned to, but this and your last comment on the previous posting are still more evasion and baiting, I’m afraid.
The response to your comments seem to me obvious: Even if consumption is rising as a share of GDP, US GDP is contracting, and so consumption is also contracting, and with it the size of the trade deficit. That is clearly what is important in professor Pettis’s discussion, i.e. whether a contraction in US net demand has the implications for China that he states, and you avoid any discussion of that issue in order to score points by nitpicking and misreading, as I wrote earlier, (and to which you still haven’t responded).
I expect you are struggling to maintain the focus of your argument on this point because you don’t want to deal with the real issues, which for this China-related blog are, I think: Is US ability and willingness to absorb Chinese excess capacity, which seems here to be defined as the difference between what China produces and what it consumes, declining? If so, what does that say about the efficacy of the stimulus package?
Would you agree that these are the core questions, and if so do you disagree with the responses by Pettis and other commenters?
I am sure that in such a graceful and voluminous writer as Pettis (and I for one appreciate his willingness to show the trajectory of his thinking as fearlessly as he does), there may be a lot of opportunities to play “Aha!” games. Of course it is very safe but not terribly useful for you to limit your writings to just that, but we are really only going to get anywhere if we treat his arguments as a whole and in context.
To repeat: Why is his basic criticism of the stimulus package and the growth model wrong? Why will China not run into the balance sheet complaints he writes about? I am glad that Pettis continues to post his very widely-read and admired commentary (something not true of all blogs on China), especially now that Brad Setser, another brilliant analyst you seem to want to misread and bait, has moved away from blogging and into policy. Since your comments are so long and, forgive me for saying this, not very well written, please be more concise and help us all by dealing with the real issues discussed here. That is a surer way for you to gain the recognition you want.
ross: “Why do you not stop simply presenting abuse unaccompanied by facts and actually address the evidence?”
i can’t believe you of all people are asking this question. ha ha (that phrase again!)how pompous and deluded you are. you yourself haven’t dealt with any of relevant issues presented in rejoinders to your vbery long comments, unless you consider getting people to read your apparently unread blog a relevant issue.
instead of baiting why don’t you address the issues and responses that have been presented to you? or better yet why don’t you simply present your position without abusing your betters?
I am back from a very interesting if long trip, in which I sensed a lot more worry and concern from investors than I have in previous trips, even as policymakers around the world proclaimed an end to the crisis. Perhaps that is a good sign, but I wouldn’t be too quick to assume that the crisis is behind us. I remember reading about a delegation that visited President Hoover in 1931 or 1932 about possible solutions to the crisis and he reportedly told them “Gentlemen, you are sixty days too late.” An economic bounce from very low levels (later known, I think, as ‘the sucker’s bounce”) convinced him and many others that the crisis was over. Still, I continue to stand by my comment last year – which infuriated so many people – that the US would be the first major economy out of the crisis and China one of the last.
David Pearson, it is pretty hard to promote consumer credit directly. Previous attempts to do so resulted in an explosion of consumer-loan-related NPLs. In a sense it would be similar to funding consumption by government debt, which of course increases consumption but not in a sustainable way. You say that “the 1920’s U.S. bubble was fueled by something as simple as the widespread adoption of installment credit for consumer durables,” but I would interpret it a little differently. I would argue that it was stoked by massive monetary expansion that occurred as the US ran twin surpluses on the capital and current account, leading to a huge increase in gold reserves and the consequent monetary expansion. In my “model” of the world, excessive monetary expansion forces the financial system to accommodate by taking on increasingly risky loans, and depending on the structure of the financial system that can result in an explosion in consumer lending or in producer lending (or of course both). The key is putting into place the structural reforms that liberalize the banking system and encourage different modes of lending, but I suspect that this would require a sort of political reform as a pre-condition (it entails giving up control of the financial system to an important extent).
Morubai, I largely agree with your analysis but perhaps I am a little more pessimistic about the likelihood of coordinated policy response. I don’t think either US or Chinese policymakers grasp the outlook and are sufficiently motivated to consider the global implications of domestic policy. Option 2 is definitely a bad outcome, but it is the default outcome if Option2 isn’t successfully pursued.
BenFan101, the gossip is that Governor Zhou has lost a great deal of credibility in the past four years and is not interested in pushing his viewpoints hard, even though most of my friends in government claim that his view of the imbalances is quite similar to those of whom I call the “monetary alarmists.” Just as President Hoover and the most knowledgeable economists in 1930-31 were unable to force their (largely correct, I think) views over the clamor of the agricultural, mining, export and domestic manufacturing interests, I think those in China who worry about global imbalance are in no position to out-shout or out-maneuver the domestic and export constituents.
Glenn M. I don’t call it predatory because I don’t think Chinese policymakers want to restrict domestic consumption and force overcapacity onto the rest of the world. I think they are stuck in this position because of the structure of the financial system and the economy. It is possible to force through the necessary changes, but at a heavy short-term cost. Any government would be reluctant to pay that cost and I believe Chinese policymakers are as afflicted with short-termism as those of other countries. Interestingly enough there is increasing gossip that those slated to take over after 2012 are far more worried about the current fiscal push than their seniors. That doesn’t surprise me.
TR, consumption is growing fast, certainly much faster than in other countries, but we need to see that continue even after the fiscal stimulus ends. There is quite a lot of pro-cyclicality in consumption behavior, and as a good Minskyite I always worry about self-reinforcing balance sheet mechanisms.
Chan-lee James, I agree that part of the ‘causes” of the imbalances in both countries are taxes – both explicit and, more importantly in the case of China, I think, implicitly. I am not smart enough to have an opinion on the impact of US health care reform, but clearly there are policies that can be used in the US to force up the savings rates, but if put into place to quickly or too forcefully this would slow the US recovery and could devastate China.
JohnT, thanks for pointing out what in most other circumstances might be seen as obvious.
Rein Huizer, my sentiments too. One possible outcome, of course, is that trade tensions increase even further. I guess I am tired of being such a bear on trade, but the atmosphere certainly has gotten worse and I don’t see it ending soon.
Seatrus, I agree with Glen that these per capita comparisons don’t mean very much and can pretty much be used to prove nearly every position as well as its opposite. For example people often say that because Chinese consumption is so low relative to US consumption, any problem requiring a surge in Chinese consumption is all but resolved, but in that case many countries in Africa, Latin America and Asia with even lower consumption levels that China should have seen unbroken surges in consumption since time immemorial, and they haven’t. It is true that china “should” spend a lot more on “public projects, such as roads, railways, airports, power stations, electricity grids, schools, hospitals, low income housing etc, and most importantly, the green technology,” but that doesn’t mean that it will happen. There are still balance sheet limitations on what any government can spend and there are also indirect adverse impacts of unrestrained fiscal expansion.
John T,
I will come back on your other points – I am simply busy on something else at present. But your argument is not logical and therefore leads you to make a further factual error which is quick and easy to show.
You write:
‘Even if consumption is rising as a share of GDP, US GDP is contracting, and so consumption is also contracting, and with it the size of the trade deficit. That is clearly what is important in professor Pettis’s discussion.’
The argument is not logical because the fact that US GDP is declining does not entail that US consumption has fallen – even if US GDP is falling US consumption can rise if it expands as a proportion of GDP. This is exactly what has happened.
In current price terms, which is what is relevant for calculating the balance of payments, US GDP between the first and second quarters of 2009 fell by $28.1 billion. But because US consumption rose from 87.2% of GDP to 87.6% of GDP US consumption actually rose. Personal consumption rose by $1.3 billion and US government consumption rose by $30.5 billion – that is total US consumption rose by $31.8 billion. As US consumption rose and did not fall obviously the reason for the decline since last year of US trade deficit cannot be due to falling US consumption as it has not been occurring.
seatrus
You numbers are fine,however,the matching point (when both country using the same amount of energy) is in 2013 and 2015(if the consumption monotone growth,then the last day consumption have to be higher by 11.5% than the first day cosnumption in the given year).
And this year is 2009 , so that points of time are four and six years away from now.
Prof. Ross: My apologies if you you took my reflections on your prolific posts as being abusive.
Nonetheless, your last reply to John T. fails to address the key issues he and others raise.
A big uncertainty is surely where the rapidly rising US HOUSEHOLD savings rate will stabilise — and its implications for the US budget defict and the Rest of the World. Your citations of quarter to quarter to changes in TOTAL consumption to “prove” your position is to say the least, unconvincing. James
“Seatrus, I agree with Glen that these per capita comparisons don’t mean very much and can pretty much be used to prove nearly every position as well as its opposite. For example people often say that because Chinese consumption is so low relative to US consumption, any problem requiring a surge in Chinese consumption is all but resolved, but in that case many countries in Africa, Latin America and Asia with even lower consumption levels that China should have seen unbroken surges in consumption since time immemorial, and they haven’t. It is true that china “should” spend a lot more on “public projects, such as roads, railways, airports, power stations, electricity grids, schools, hospitals, low income housing etc, and most importantly, the green technology,” but that doesn’t mean that it will happen. There are still balance sheet limitations on what any government can spend and there are also indirect adverse impacts of unrestrained fiscal expansion.”
If the per-capita statistic is meaningless, and that would include any statistic that could be manipulated. China does not possess the monopoly in data manipulation. Case in point, during the dot.com boom in the USA during the early 2000, many Wall Street analyst dubbed it the new economy and they were using dubious mean of evaluation all those dot.com companies that were not making any money by themselves but by constantly raising capital by selling share again and again! Enron and WorldCom were cooking their book with the help of accounting firm such as Arthur Andersen in case of Enron.
Also, the real state bubble in the USA was also subject in data manipulation to support that housing price can always go up since the population was increasing really fast so the demand for house was never enough!
Anyone can use statistic to support any point and statistic manipulation is not reserved to a particular nation.
There is a basic difference between Africa and China, China has a track record of building massive infrastructure so all the potential infrastructures project stated by Seatrus is backed by China record in building Highway, bridges, rail track, airport, housing and speed in urbanization rate. Besides, China national deficit is in much better than the USA and Japan balance sheet. True, that China start from a lower base than many advanced countries but that does not mean that their effort to be deride and considered to be meaningless…
They have to start from a lower base, but the main point that they keep improving despite all the difficulties encounter.
I am not saying that the CCP are saint or anything like that but you have give the devil his due!
Well I should probably behave myself a little better and not be an ass but let me make a few comments about that much vaunted increase in consumption as a % of US GDP:
1) Transfer payments. massive this year, as I recall its 20%+ of income this year. This isn’t sustainable and is likely to be withdrawn.
2) For next quarter, the cash for clunkers effect is going to be huge.
To get more unbiased view of this look at consumption adjusted for these two. The transfer/fiscal ammo isn’t unlimited.
Here’s how I would interpret the trade data: I’d make the ‘first day’ of the ‘financial crisis’ Jul 1, 2007. Since then China’s monthly exports grew more or declined less year-on-year than imports in all but four months (Feb, Apr, May and Jun 2008) through Jan 31, 2009. During that period, there was a cumulative year-on-year INCREASE (i) in imports of $234.6 bio; (ii) in exports of $322 bio; and (iii) in the trade balance of $87.4 bio.
That trend reversed beginning in Feb 2009. Beginning in Feb and through the Jul 2009 trade numbers, monthly exports have declined more year-on-year than imports in all but one month (Mar 2009). During this period, there was a cumulative year-on-year DECREASE (i) in imports of bio; (ii) in exports of bio; and (iii) in the trade balance of $ bio.
If we start in Feb 2009 and stop with the last print, it seems fair for Prof Ross to say that there has been “a continuing trend whereby China’s imports have declined much less rapidly under the impact of the financial crisis than its exports” (again, with one contrary data print out of six, in Mar). But since our troubles began on 7/1/2007, there has been a net increase in the trade balance of about $51 bio based on which it seems to me fair for Prof Pettis to say that imports have fallen faster than exports (the last data available to Prof Pettis when he was writing in the FT on 7/29/2009, for Jun 2009, was even more supportive: the net increase in the trade balance was $65.8 bio).
One might argue that exports weren’t ‘falling’ at all until the Nov 2008 print. If we start in Nov 2008, through Jul 2009 imports fell year-on-year a cumulative $ bio while exports fell less: $ bio, for a net $13.5 bio increase in the trade balance, nothwithstanding the recent reversal of this trend. (Through the data Prof Pettis had for his 7/29/2009 FT piece, imports fell bio, exports and the trade balance increased $28.2 bio.)
So: as Rien Huizer suggested much less tediously, both Prof Pettis’ and Prof Ross’s views seem consistent with the data, depending on where you start and stop.
In my second paragraph that’s a cumulative year-on-year DECREASE (i) in imports of bio; (ii) in exports of bio; and (iii) in the trade balance of $ bio. Sorry, sloppy.
I think numbers in brackets did not post.
Second paragraph should be: cumulative year-on-year DECREASE (i) in imports of -$120.4 bio; (ii) in exports of -$156.8 bio; and (iii) in the trade balance of -$36.2 bio.
Fourth paragraph: Nov 08 through Jul 2009 imports fell year-on-year a cumulative -$195.3 bio while exports fell less: -$181.8 bio, for a net $13.5 bio increase in the trade balance, nothwithstanding the recent reversal of this trend. (Through the data Prof Pettis had for his 7/29/2009 FT piece, imports fell -$178.7 bio, exports -$150.6 and the trade balance increased $28.2 bio.)
Bcg81
There is a legitimate issue you raise over when to date the beginning of the international financial crisis from. I was taking it from the collapse of Lehman’s in September 2008, which is when the interbank lending collapse took place, but an argument can be made out, as you say, that it should be dated started earlier. Let us however consider your proposed starting point of July 2007.
This is again a case where it slightly frustrating one cannot put charts in the comment section as they show the pattern very clearly. I have produced one for China’s trade here. The pattern it shows is clear.
Given the variability of trade on a month by month basis it is best to use a three month moving average. On this basis China’s trade surplus was gently falling from July 2007, when it was $23.6 bn, your starting date, until July 2008 when it was $19.2 bn. Then it began to shoot upwards peaking in January 2009 at $38.1bn – this was the period when imports were falling more rapidly than exports. But after that it began to fall very rapidly and by June 2009 it was down to $12.5 bn or only slightly more than half the level of July 2007.
So even if we take your July 2007 starting point China’s trade surplus has fallen by nearly half. Therefore whether we take your starting point of July 2007 or the September 2008 I had in mind China’s trade surplus has fallen very substantially since the financial crisis started.
As to when the financial crisis should be dated from it is also interesting to look at US consumption. A chart showing the trend can be found in the same place as for trade. Total US consumption, the sum of personal and government consumption, rose rapidly as a proportion of GDP from 1997 until the end of 2003, then stabilised until the end of 2007, and then began to rise sharply again from the beginning of 2008 under the impact of the developing financial crisis. Taking precise figures US total consumption was 85.4% of GDP in the second quarter of 2007 – that is immediately before July 2007 which you take as the beginning of the financial crisis. In the last quarter of 2007 it had risen to 85.8% of GDP. In the second quarter of 2009 US consumption was 87.6% of GDP. That is a rise of 2.2% of GDP since prior to July 2007 and an increase of 1.8% of GDP since the last quarter of 2007. Therefore even if you take the financial crisis as starting earlier, as you do, then it is clear consumption has increased, and saving fallen, as a proportion of US GDP.
Chan lee James
That is a most gracious apology and let us take that whole matter as finished and concentrate on the most important – the actual trends in the US and Chinese economies. The question of whether what is important is US private consumption or US total consumption (private plus government) depends on what is being analysed. If we were looking at, for example, the potential for US auto sales it would be highly relevant to distinguish between private and government consumption. But what was being analysed in these exchanges was the US balance of payments deficit and this depends on total US consumption, investment and saving and not only on private consumption.
Nemo incognito – your comment about the unsustainability of the current level of US transfer payments is an argument that consumption in the US may fall in the future. But it also may not – as a countervailing force for example US investment is under strong downward pressure and this may more than offset any drop in transfer payments. The balance depends on a number of factors. Furthermore the US balance of payments deficit could shrink, that is one of the ‘global imbalances’ could decline, even if US consumption rose as a proportion of GDP – that would occur if US investment continued to fall more rapidly than US saving. The point I was making was that so far under the impact of the financial crisis US consumption has not fallen as proportion of the US economy – on the contrary it has risen quite significantly.
Therefore taking these points the factual situation is:
US consumption has risen, not fallen, as a proportion of US GDP since the financial crisis began.
China’s trade balance has declined – because its imports have fallen less than its exports – this applies whether you take the financial crisis as starting in July 2007, January 2008, or September 2008.
These trends are those I set out in my original comment and are the opposite of the trends stated by Professor Pettis.
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