from Follow the Money

If China doesn’t like US economic policies …

March 21, 2006

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Maybe it should stop financing them.

Just a suggestion.

At least in my view, Chinese premier Wen's criticism of US economic policy - and US economic scape-goating -- would have a lot more credibility if China wasn't spending around $250b a year (10% of its GDP) resisting market pressure for China's exchange rate to appreciate. 

Because of that policy, China ends up financing a rather significant fraction of the US fiscal deficit (with Chinese purchases of Treasuries) and the US current account deficit (with Chinese purchases of US bonds, including mortgage backed securities).  In the process, it also masks the impact of bad US economic policies.  See my previous post.  Or Geithner's speech.

No doubt, there is plenty of blame to go around. 

The US isn't serious about doing anything to reduce its fiscal deficit.   Just try to read the President's latest remarks.  To the extent that they make any sense (see DeLong), the President seems to think the current budget deficit comes from those parts of the budget that are currently running cash flow surpluses.  I understand where the spin on mandatory spending is coming from (still hoping to partially privatize social security?), but it is good for the spin to have at least some connection to budget reality.

And President Bush has done absolutely nothing to try to assure that all parts of America benefit from globalization.  Cutting taxes on dividends, estates and capital gains -- and proposing to dismantle the United States most effective form of retirement wage insurance (social security) -- is hardly a creative policy response to intensified competition from labor rich economies around the globe.

Yet China's commitment to exchange rate flexibility seems every bit as thin as the Bush Administration's commitment to fiscal sanity and sharing the benefits of growth widely.   The RMB's appreciation against the dollar since last July has barely offset ongoing inflation differences.  Yes, inflation in the US is higher than inflation in China, so the RMB needs to appreciate a bit just to keep everything (the real bilateral exchange rate that is) the same.

So far, China's (positive) talk about rebalancing its own growth hasn't generated tangible results either.   Exports and fixed asset investment continue to increase by 25% y/y.   In other words, China is growing the same way it grew in 2003, 2004 and in 2005.   Nothing much has changed.

I'll have much more on the fact that no one really wants to do anything other than talk about global imbalances later.   Though I probably should at least try to write about something else every now and again.

One last set of points: 

Asking a bunch of foreign (American?) business executives in China to convince the rest of America to stop blaming China for America's home-made problems seems to have what PR folks would call "bad optics."    American businessmen using China as an export base are among the folks profiting the most from China's current policy of masking the impact of bad US policies by providing the US with cheap credit.   They hardly want much to change -- and certainly don't want China to change its peg. They may not be the most credible of spokespeople.   

But it proposing to use US businessmen in China as a conduit may suggest something about how China's leadership sees the world.   China's leadership may think the current arrangement profits the US (and specifically US business) so much that the US won't dare change it.   But just because the undervalued RMB and Chinese financing of US deficits helps some in the US doesn't mean it all in the US share in the benefits.

I used to think that US policy makers got a somewhat distorted take on Latin America because they talked primarily to Latin economists educated in the US.   That created a perception of a greater convergence of economic thinking that really existed (see Latin America today).   Chinese policy makers who talk primilarily with US businessmen interested in investing in China may be running a somewhat similar risk.

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