From The Australian Financial Review, via Lowy Institute’ website:
Seemingly unsustainable global imbalances have been with us so long that it’s hard to maintain the anxiety: maybe it is different this time and there is no need for painful adjustment.
While we have been waiting for something to happen, however, China’s imbalances have come to loom larger in the wider story. China’s trade surplus was always at the forefront of America’s attention, but a few years ago it was only a small element in the overall equation. As recently as 2003, the current account surplus was $US50 billion and reserves were $US100 billion – far smaller than Japan. Now China is running a current account surplus equal to 10 per cent of its gross domestic product (more than double the figure of two years ago) and its reserves are $US1.2 trillion, equal to half of its GDP and far larger than Japan’s. This is neither sensible nor sustainable.
Why isn’t it sensible? Funding this low-yield reserve holding can’t be the best use of resources for a country that still has, on World Bank reckoning, 135 million people living in poverty, and huge problems of pollution and water shortages. Capital should not be flowing uphill from emerging-but-still-poor countries to the mature economies. [Full Text]
Stephen Grenville is a visiting fellow at the Lowy Institute for International Policy and former deputy governor at the Reserve bank of Australia.