The Perils Of Thrift

Newsweek looks at the economic ties between the U.S. and China and their impact on the current market crisis as well as on the future of China’s economic growth:

The relationship is symbiotic and mutually intoxicating, argues Tom Holland, a Hong Kong-based financial columnist. He calls the two giants “drunkards reeling crazily down the pavement in a tight embrace.”

As such, one of them can’t do a face plant in the gutter without the other toppling too. That, at least, is the risk Beijing policymakers run today unless they sober up and execute a delicate industrial pirouette economists call “rebalancing.” It entails consuming much more of national output at home, relying less on exports and slowly weaning the American financial system off cheap Chinese credit. The problem: China’s economy is as thoroughly hard-wired against consumption-led growth as America’s is for it. And all the money in the world—even the $1.8 trillion in China’s foreign reserves—can’t buy a quick fix. Here’s why:

China’s domestic consumption was an anorexic 38 percent of its GDP (a third less than India’s) in 2007. The other 62 percent came from investment, much of it spent on export-oriented infrastructure, plus net exports. Consumption as weak as China’s is unprecedented even for a developing industrial economy, and it makes the shift to a domestic demand-led growth model following the 20th-century pattern set elsewhere in East Asia extremely tricky. The idea that China can make this transition smoothly from such a “skewed position … is rather naive,” says Hugh Young, managing director of Aberdeen Asset Management Asia.

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