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'Real victims' of global imbalances

Updated: 2011-03-25 10:24

By Hua Xiuping (chinadaily.com.cn)

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Few economic challenges in recent times have perplexed international economists and policymakers quite as much as the persistent global imbalances between the world's major economies. The imbalance between the United States and China is particularly problematic, with wide-ranging implications. For example, the United States current-account deficit has been so large for so long that the world's largest economy is also the world's greatest debtor nation. In contrast, China, which is now the world's second-largest economy, has for a long time been running large and consistent current-account surpluses. While US businesses and politicians are quick to blame America's deficits on China's unfair trade and currency policies, China is quick to counter that the United States is running deficits with ALL of its trading partners and that America owes its sorry state of affairs to living beyond its means by borrowing against its future.

Is America's current-account deficit a sign of economic weakness that the American people must bear? Is China's current-account surplus a sign of China's economic health and wealth? The short answer is no. As virtually every textbook in international finance may teach us, a current-account deficit is not always a sign of weakness and a current-account surplus is not always a sign of strength.

From the US perspective, current-account deficits are the result of a number of factors including the global saving glut and the dollar's status as world reserve currency. Both of these factors have led in a surge of capital inflows in recent years, resulting in an abundance of cheap public and private debt. As economist Martin S. Feldstein recently noted, foreign investors' financing of the large current-account deficits of the US is in fact a great gift to the US economy and the American people, allowing them to consume 24% of the world's energy although they comprise only 5% of its population.

From China's perspective, to maintain its export-oriented economy, domestic consumption has been severely constrained. Following the economic growth models used by Japan, Germany, and South Korea, the Chinese government has designed policies to create favorable business environments for producers and exporters. Low interest rates, a favorable exchange rate, low wages, subsidies to state-owned enterprises, export tax rebates, and minimal investment in public social safety net expenditures such as health care and education have all been important components of this policy. By many measures, while average Chinese are working harder than Americans, we are consuming much less.

Regardless of fault, it is most important to better understand the nature of the imbalances and who is at risk and who bears the cost. From the United States perspective, costs and risks are borne by ordinary American workers who are suffering job losses as factories shut down plants and move them overseas. From China's perspective, the greatest concern is on the part of the Chinese government, which holds a significant proportion of American debt and are concerned about the solvency of the US government.

So, it is not that difficult to find that both Chinese and Americans are the "real victims" of global imbalances. More important, a major dispute regarding policy options to correct the imbalances is a question of which group of countries has to adjust. Undoubtedly, a symmetrical approach is in need. The deficit countries have to increase savings ratios and consolidate government budgets, while the surplus countries should raise wages and increase domestic demand.

Since all of us are "real victims," why not make a change now? Have we Chinese really prepared so far?

Dr Xiuping Hua, assistant professor in Finance, Nottingham University Business School (NUBS), University of Nottingham Ningbo China (UNNC)


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