China Rising

Over the past 20 years, China’s economy has grown by nearly 10 per cent a year, lifting some 377 million people out of poverty. Even the rampant fraud that exists in the Chinese banking system can’t slow economic growth. U.S. manufacturers, farmers and service providers have seen exports to China grow an average of 22 per cent a year since China joined the WTO in December 2001. The rise of protectionism in America has triggered a rise in economic nationalism in China that could undercut the mainland’s promises to the WTO. China can and will backtrack on free market reforms if America fails to change its tune.

China’s economy hit an 11-year high in July 2007. It grew by 11.9 percent in the second quarter. It produced an output of $2.9 trillion in 2006. China’s economy could surpass Germany’s by the end of 2007, leapfrogging ahead of the 2010 date most economists predicted, exceed Japan’s by 2020 and become the world’s leading economy by 2040. China’s overall economy is larger and healthier than that of five G-8 members – and its people richer – than current government figures show.

By another measure, known as purchasing-power parity, China is already the world’s second-biggest economy. If exchange rates are adjusted to equalize the cost of goods in different countries, then the value of China’s total output was $10 trillion in 2006, according to estimates by the IMF. That eclipses Japan’s $4.2 trillion and Germany’s $2.6 trillion, and hot on the heels of America’s $13 trillion.

It is not just the Chinese government that has trillions of dollars in reserves. So does the consuming public – who are savers. In fact, China’s bank depositors are stuffing more money into banks than they can possibly lend or invest, endangering bank profitability and operations in general. The People’s Bank of China, the country’s central bank, has more than $3.5-trillion in savings accounts.

It is a bankers nightmare because the bank must pay interest to depositors while unable to put the cash to work to generate income for the bank. Gross national saving in China amounts to more than 40 percent of gross domestic product, suggesting that Chinese households are much more frugal than their U.S. counterparts, who are swamped by debt after chasing the American dream and designer lifestyle. Eight out of 10 mainlanders are satisfied with the way things are going in China, the 2006 Pew Global Attitudes Project concluded. The 81 percent satisfaction rate is an increase from the 72 percent recorded in 2005 ─ the opposite of dissatisfied Americans.

America is characterized by the opposite imbalance: an excess of gross domestic investment over domestic savings. If, and when, these basically symbiotic imbalances becomes unsustainable, tinkering with the yuan/dollar exchange rate will have little impact. Quite different policy changes have to be made by career politicians in Washington, D.C. to boost U.S. savings rate, while lowering China’s. To do so without triggering a recession in America and inflation in China is the challenge.