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U.S., China and the onset of global imbalances
Effects on China and implications for global re-balancing
3
The ‘savings glut’ debate
Not just global imbalances but also globalisation
Acceleration in 1990s; Freeman dates to 2000s
Focus on U.S. & China, but part of larger picture of emerging markets, financial deregulation and independent central banks
4
Changed global macroeconomic structure & the 2008 financial crisis
Globalisation: inflation and the ‘Great Moderation’Global imbalances: savings glut vs. consumption via borrowing; trade surplus vs. trade deficitForeign exchange reserve accumulation and the appetite for U.S. debtExchange rate policy and global re-balancing
5
Real GDP growth, 1980-present
-4
-2
0
2
4
6
8
10
12
14
16
1980 1981 1982 1983 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
% g
row
th
China
WORLD
UKUSA
Germany
Japan
France
China rising
Source: IMF
6
The China Effect
International trade
Global capital flows
Global supply and demand for commodities & raw materials
Incremental global growth
7
China’s exports, 1992-2006
Source: UNCTAD.
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Thousands
US$
Other
Manufactures
Clothing &
apparel
accessories,
textile, footwear
Office,
telecommn.&
electrical
equipment
Machinery &
equipment
Mineral Products
Agricultural
Products
8
China’s imports, 1992-2006
Source: UNCTAD.
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
199219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
06
Thousands
US$
OtherManufactures
Chemical andrelatedproducts
Office,telecomm.&electricalequipmentMetals andother minerals
Petroleum &gas
Agriculturalraw materials
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U.S. import partners
0
50
100
150
200
250
300
Canada China Mexico Japan Germany UnitedKingdom
SouthKorea
France Italy Malaysia
US$
billions
Source: IMF Direction of Trade statistics showing average annual trade, 2000-2007.
10
China’s export partners
0
20
40
60
80
100
120
140
UnitedStates
Hong Kong,China
Japan South KoreaGermanyNetherlands UnitedKingdom
Singapore RussianFederation
Italy
US$ billions
Source: IMF Direction of Trade statistics showing average annual trade, 2000-2007.
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Gravity estimates
USA imports 2000s
Canada 6.226***Mexico 5.247***China 5.408***EU 1.630***Middle East 1.511**Asia ex. China -1.161**
China exports 2000s
USA 6.003***Canada 3.376***East Asia 4.521***SE Asia 3.271***Mexico 2.737**EU 2.232***Australia 3.386***
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Gravity estimates
USA imports 1990s
Mexico 14.31***Canada 12.96***China 4.237**EU 1.630***
China exports 1990s
USA 9.367***East Asia 7.280***Australia 6.749***Canada 6.679***SE Asia 6.430***Mexico 5.057**Middle East 4.077***S. America 4.025**Africa 3.119**
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Gravity estimates
USA imports 1980s
Mexico 13.62***Canada 7.128**Middle East 5.634***Asia ex. China 2.255***EU -1.771***
China exports 1980s
Australia 14.72***Canada 13.47***Middle East 12.56***S. America 11.04***Mexico 10.63***Africa 10.38***USA 8.457***EU 7.965***
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PPP adjusted share of global GDP
0
5
10
15
20
25
30
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
US A
Chi na
J a pa n
Ge r ma ny
UKFr a nc e
The twin engines of growth
Source: IMF
15Source: IMF
But, low levels of consumptionGDP Per Capita (PPP), 2008
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
Euro area Unit edSt at es
Unit edKingdom
Aust ralia andNew Zealand
Middle East China East Asia Sout hAmerica
Sout h Asia Af r ica Cent ral andEast ernEurope
CIS &Mongolia
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Globalisation
Of the global labour force of 3 billion, roughly ½ were added at the start of the 1990s through the global integration of China (opening in 1992), India (opening after the 1991 crisis), and Eastern Europe (fall of Communism).Freeman calls this the ‘great doubling,’which has halved the capital/labour ratio, resulting in lower cost of production, goods/services, and encouraged offshoring to utilise the labour from emerging markets.
17
Foreign investment to developing countries
0
10
20
30
40
50
60
70
80
90
100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Bill
ions
USD
Sub-Saharan Africa Latin America & Caribbean East Asia & Pacif ic Eastern Europe & Central Asia
18
Low inflation during the ‘Great Moderation’
-20
0
20
40
60
80
100
120
140
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Uni ted States East Asia Eur opean Union Wor ld Emer ging and developing economies
Source: IMF.
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U.S. base interest rates
0
1
2
3
4
5
6
7
Jan‐00
May‐00
Sep‐00
Jan‐01
May‐01
Sep‐01
Jan‐02
May‐02
Sep‐02
Jan‐03
May‐03
Sep‐03
Jan‐04
May‐04
Sep‐04
Jan‐05
May‐05
Sep‐05
Jan‐06
May‐06
Sep‐06
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
Jan‐09
May‐09
Sep‐09
%
Source: U.S. Federal Reserve Board.
20
10 Year U.S. Treasuries
0
1
2
3
4
5
6
7
Jan‐0
0M
ay‐0
0Se
p‐00
Jan‐0
1M
ay‐0
1Se
p‐01
Jan‐0
2M
ay‐0
2Se
p‐02
Jan‐0
3M
ay‐0
3Se
p‐03
Jan‐0
4M
ay‐0
4Se
p‐04
Jan‐0
5M
ay‐0
5Se
p‐05
Jan‐0
6M
ay‐0
6Se
p‐06
Jan‐0
7M
ay‐0
7Se
p‐07
Jan‐0
8M
ay‐0
8Se
p‐08
Jan‐0
9M
ay‐0
9Se
p‐09
%
Source: U.S. Federal Reserve.
21
Gross domestic saving, % of GDP
10
20
30
40
50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
United States Euro area East Asia China
Source: World Development Indicators, World Bank.
22
Current account balances, % of world GDP
-2
-1.5
-1
-0.5
0
0.5
1
1.5
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007%
United States Euro area Emerging Asia Oil exporters
Source: World Development Indicators, World Bank.
23
Change in reserves, % of GDP
‐5
0
5
10
15
1990 1992 1994 1996 1998 2000 2002 2004 2006
China IndiaLatin‐America Middle East Oil exportersEmerging Europe
Source: World Development Indicators, World Bank.
24
Exchange rates of surplus countries
0
20
40
60
80
100
120
140
160
180
200
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
2005
q01
2005
q03
2006
q01
2006
q03
2007
q01
2007
q03
2008
q01
2008
q03
2009
q01
Japan
India
Phil ippines
Thailand
Mexico
China
Hong Kong
Malaysia
Saudi Arabia
United Arab Emirates
Singapore
Kuwait
Source: IMF. Exchange rates against SDRs.
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Adding up to a crisisRise in global labour supply; fall in prices of traded goods & servicesFall in global capital to labour ratio; increasing returns to capitalGlobal imbalances: excess liquidity, cheap credit & leverageCapital controls & trapped savings limited capital account outflows in EMs
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Adding up to a crisis
Inflation targeting regimes in developed economies: not focused on asset bubbles.Fixed exchange rate regimes prevented automatic re-balancing as purchasing of U.S. Treasuries continued regardless of the yields.
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Macroeconomic context of 2000s
Last US slowdown ‘avoided’ recession after 2001 in part because of loose monetary policy, i.e., cutting interest rates.Asian recovery after Asian financial crisis of 1997/98 with net capital flows turning positive in 2002.China joined WTO in December 2001; multi-fibre agreement phased out in January 2005.Demand factors: rising commodity prices in 2000s, leading to acceleration of Middle East reserves.
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The 2008 global financial crisis
1980s financial deregulation; 1990s globalization; 2000s global imbalances
Dot.com bubble sub-prime mortgages credit crunch
Housing has much wider coverage than tech stocks & securitization spread the debt instruments throughout global markets
Consequences of the financial crisis for China & implications for global re-balancing
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Avenues of effect of global financial crisis
Financial effects: contagionReal economy effects: de-coupling
Credit crunch in the West vs. excess liquidity in China due to trapped savings and few diversified sources of investment, particularly inter-temporal allocation of assets
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Financial sector effects: contagion
Some state-owned commercial banks have write-downs, but of limited magnitude.No comparable trade in securitised assets, so limited exposure to the financial crisis.Despite limited global integration, China’s stock markets have fallen dramatically since October 2007 but recently risen over 80% since January… followed by a 20% drop in August.Reflects concerns/optimism about the real economy.
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Real economy effects: de-coupling
Exports have collapsed, resulting in 20 million unemployed migrant workers.Unemployment as a result is rising, though not captured by official figures which is expected to rise to 4.5%.Annual growth was 9% in 2008 and 7.1% in first half of 2009, with fears of continued fall in exports dragging down growth but will it be offset by increased government spending?
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Falling consumption/rising savings
Source: China NBS
-20%
0%
20%
40%
60%
80%
100%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Composition of GDP in China:1978-2006
Consumption Government Spending Investment Net Exports
34
Fiscal stimulus & public spending
4 trillion RMB/$586 billion to be spent as a stimulus measure, plus another $125 billion on health (to achieve universal coverage by 2020) and around $400 million on rural pensions.
$1.26 trillion in lending in first 9 months of 2009 has led to GDP growth of 7.7%, but asset bubbles building in stock markets and real estate.
Infrastructure is needed, but few measures to address corporate savings and little on other social welfare coverage, e.g., pensions, unemployment.
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Savings, jobs & institutional reform
Opportunity to focus on reducing motives for precautionary savings and address social insecurities to increase consumption.Reforming capital markets to reduce corporate savings so that productive investments can take place and increase domestic demand.Public works (infrastructure) create jobs to absorb job losses and provide future benefits.Must do more to shore up institutional foundations of the market.
36
Re-industrialization & services
0%
20%
40%
60%
80%
100%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Sectoral Composition of GDP:1978-2007
Agriculture Industry Service
Source: China NBS
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Internal reasons for global re-balancing
Export-orientation and synchronization with global business cycle point to need for internal re-balancing.Volatility in its own assets points to the need for reform, e.g., stock markets and housing.Participate in global regulatory reforms, including ‘early warning’ system against build up of macro imbalances.
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“Going out” policy
Launched in mid 1990s and culminated in first commercial outward FDI with TCL and Thomson deal in 2003, Lenovo and IBM, Rover, Hummer, etc.Before crisis fully hit, Chinese firms were raising funds for overseas M&A deals.Stalled but renewed as second half of 2008 witnessed the first capital account deficit in a decade.However, backlash exists & there is need to differentiate among SWFs, SOEs and private firms.
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Outward FDI
2008: outward FDI totalled $55.6 billion, a 194% increase over a year earlierOf which, $40.7 billion was from the financial sector and $11.9 billion from non-financial sector.Also, $130 billion deficit in portfolio investments.China receives around $60 billion p.a. in inward FDI, so it may be a capital exporter, especially as investments in energy, minerals, raw materials accelerated in 2009.
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Implications for global imbalances
Already some global re-balancing:China’s exports (and imports) are down and the U.S. trade position has improved.U.S. savings rate is up some four-fold and Chinese consumption is steady.
Gradual re-balancing is preferable as Western economies issue record levels of debt, and China may well continue its surplus this year. Participate in global regulatory reforms, including ‘early warning’ system against build up of macro imbalances.
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Conclusion
The U.S.-led crisis has its roots in a changed global economy and institutional structures.There are, nevertheless, significant real economic consequences for China as its growth had slowed to less than the desired 8%.Where China goes from here is a challenge, but also an opportunity to focus more on domestic demand, institutional reform and also to play a greater role in the international system.For the U.S., the need for revisiting monetary policy, financial regulation and a recognition of the nature of the global economy of the 21st century is no less profound.
