Friday, August 12, 2005

Chinese Economy

I'm normally not patient enough to think my way through a whole Brad Setser post. He has a very interesting post on imbalances in the Chinese economy. Two interesting paragraphs:
I increasingly think China's dependence on exports is a sign of weakness, not of a sign of strength. Chinese domestic demand is not growing fast enough to match the increase in China's production capacity. Politically, it is unrealistic for China to expect to rely on exports to solve its domestic problems - whether deflation or a lack of domestic demand. And as exports rise toward unheard of levels for a major, continental scaled economy, China increasingly is exposed to the global business cycle. And its dependence on the US - a country that cannot afford to buy all the products it currently buys from China without a huge, subsidized credit line from the Chinese government - is equally unhealthy, and is a major risk to China.
I do not believe Chinese-US economic strains can be solved with better public diplomacy, so to speak. Putting US-Chinese economic (and ultimately political) relations on a firmer footing requires taking real action to address the very real underlying imbalances. It is not healthy for the "America's financial stability" to rest "on the continued Chinese purchase of [US] government's debt." It is not heathly China's financial stability to rest on continued 30% year over year export growth. The US will have to accept the reality of China's economic power, something that it has yet to do. But China also will have to recognize that its economy is now too large for it to rely on exports to solve its domestic economic problems.


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