China is growing incredibly fast. No doubt net exports are contributing significantly to China's current growth. But net exports are equally clearly not the only reason for China's current growth. If net exports contributed 3% -- that is just a guess, but one consistent with the data from q1 -- to China's 12% growth in q2, China would have grown by a very respectable 9% even if its trade surplus didn't grow.
That is the missed opportunity. This is a time when the global economy should be adjusting.
Sure oil prices are high, but the Middle East is investing more of its oil revenues at home, supporting global demand. I don't really buy the argument that the Gulf's boom is totally different this time around. Most oil revenue is in government hands, government sponsored-investment is still the norm (and no doubt will generate some white elephants) and with the Gulf's ill-conceived dollar pegs generating negative real interest rates, government policy is creating very strong incentives for private-sector investment (and quite possibly over-investment). No matter. An oil-boom is still and oil-boom. Growing domestic spending and investment in most oil and commodity-exporting economies are contributing to global demand growth and likely offsetting most of the impact of the recent rise in oil prices.
After all, most analysis suggested that the key condition for global adjustment was an acceleration in global growth relative to US growth. That has happened. Big time. The world economy has decoupled from the US-housing slump. Yet at best the US current account deficit has stabilized in nominal terms -- and it may even start to rise once $75 a barrel oil is reflected in the US import data. It should be falling.
I would be a lot happier if the combination of strong global growth -- South America, Western Europe, Eastern Europe, the Middle East, India and China are all humming -- and a weak dollar was leading the US current account deficit to fall by $100b a year, not pushing China's current account surplus up by $100b a year.
If the global economy doesn't adjust now, when will it adjust?
The irony is that right now, China is at a stage in its domestic economic cycle where it doesn't need the stimulus from net exports, while the US does. Yet with the dollar at a multi-year low -- and with the RMB still effectively pegged to the dollar -- China ends up getting a stimulus from the external side precisely when it doesn't need external stimulus. Right now, China's authorities want less growth, not more. China's premier famously called China's current pattern of growth unstable, unbalanced, uncoordinated, and unsustainable ...
The latest data suggests China's economy is now even more unbalanced.
Right now, China -- like the Gulf -- could use a somewhat stronger exchange rate. The latest data suggests that Chinese inflation now tops 4%. A stronger RMB would help contain inflation (see Brazil, India) and could substitute for various policy steps to curb domestic demand.
I was listening to the BBC last night, and I heard a lot of talk about how China's central government has only limited control over China's economy. Business Week has sounded a similar theme. And that story no doubt has a great deal of truth -- the provinces don't necessarily do what Beijing wants.
At the same time, I don't think anyone doubts that China's central government -- not the provinces -- has total control over the exchange rate. And to me the striking thing about the past few years is that the central government hasn't been willing to use the one tool of macroeconomic control that it clearly controls ...
Update: The Econocator nicely summarizes the reaction from various sell-side shops to the latest China data.