I worry about the total lack of understanding of how the US economy is affected by China. I just read Michael Pettis’s interesting book ‘The Great Rebalancing’ and summarize its argument/implications for the US because it will effect everyone reading this post in the US and Europe. Michael’s book is a bit technical and its implications not fully elaborated, so here goes: a whole book in a few paragraphs.
China has a totally manipulated economy, which greatly adversely affects the US and other western economies. It keeps its exchange rate while running very large trade surpluses especially to the US which is very deflationary for the US economy. It does that by buying US Treasury Bills and US assets. It also suppresses its own internal demand so imports are limited. The deficit that needs US Treasury Bill financing is driven in part by US trade deficits not to mention US unemployment.
The Chinese population get very low interest rates on their savings because the finance sector is basically government banks and there is no competition. The vast savings of this and of government and… corporate profits allow very low interest rates on infrastructure investments many of which including the rail to the far west will never achieve any return. So a lot of non-performing loans are building up internally. Only 35% of Chinese GNP is consumed which is unprecedented in world history, because while wage rates are rising they are still low relative to output.
This low consumption/high investment model has been good for China, but will end in tears given how vast the underperforming investments are. More to the point, US employment and deficits have been the price of China’s growth and one fine day the US and Europe will wake up to the cost economic and strategic of the whole strategy that essentially started with Nixon. It has suited our economic and political elites because the China Option aka the China Price has kept US wage rates and prices down, weakened unions, increased Wal-Mart and other importer profits, and allowed growing inequality to soar which they like.
No one talks about this: the rhinoceros in the room. I wonder why?