Monday, December 15, 2008

China's big rebalancing act

Interesting comment from Michael Pettis today in the FT:
The second way is for trade-surplus countries to engineer sharp increases in domestic consumption, most likely though massive fiscal expansion, that match the decline in US household consumption and so reduce the overcapacity problem. The problem with this solution is that the scale of the adjustment is beyond the capacity of most countries. A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP – or a nearly 40 per cent growth in consumption. This is clearly unlikely.
This is an important point. China stimulating domestic demand to compensate for the US going on a diet is all well and good, but we cannot expect it to work miracles. China is growing in importance in the world economy, but it still constitutes a tiny fraction of world GDP.

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