Op-Ed Contributors

Behind China's trade deficit

By Fan Gang (China Daily)
Updated: 2010-04-30 07:52

The yuan's exchange rate, then, is really a secondary factor in China's external account. Put another way, the global imbalance could be corrected more efficiently by addressing other, more fundamental factors. The fundamental factors underlying the US external imbalance are large fiscal deficits and low household savings, owing to excessive financial leverage. The fundamental factors on the Chinese side are high corporate and household savings, together with some distortion of resource/utility prices.

Indeed, the current situation indicates that a significant adjustment in exchange rates may not be needed at all in order to redress global imbalances. If that is true, and China should not worry about the yuan's exchange rate, should it worry about its economy overheating? After all, its previous trade deficits in the era of reform - such as in 1992-1996 and 2003-2004 - all occurred at times of overheating.

But there are differences between now and those earlier periods. For example, when rapid investment growth in 2004 led to overheating, world markets were booming. At that time, both domestic investment and exports required immediate tightening. Today, by contrast, although domestic investment is growing very strongly, external demand has not recovered to its previous levels.

The result is the March trade deficit, caused mainly by exceptionally high annual import growth (65 percent) coupled with relatively low export growth, which reached a nominally impressive 24 percent only because of the sharp decline recorded in the base period. Such a single-factor situation is easier to deal with than the double-factor situation of 2004, and because the high investment demand has been mainly stimulus-related this time, policymakers can handle it in a more timely fashion if they perceive a problem.

That said, the ratio of capital formation does require careful monitoring. The last time China saw such high growth in domestic investment, the savings rate was not as high as it is now.

A trade deficit has emerged at a time when the national savings rate is as high as 51 percent. That means that investment is extremely high. Despite the high share of infrastructure investment, there is an urgent need to manage the potential risks.

The author is professor of economics at Peking University and the Chinese Academy of Social Sciences, director of China's National Economic Research Institute, secretary-general of China Reform Foundation, and a member of the Monetary Policy Committee of the People's Bank of China.

Project Syndicate

(China Daily 04/30/2010 page8)

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