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Friday, July 24, 2009

"All Stimulus Roads Lead to China"

Should emerging countries, China in particular, intentionally spend more on imports from the U.S.?:

All stimulus roads lead to China, by Barry Eichengreen, Commentary, Project Syndicate: Now that the “green shoots” of recovery have withered, the debate over fiscal stimulus is back with a vengeance. ... It is possible to argue the economics both ways, but the politics all point in one direction. The US Congress lacks the stomach for another stimulus package. ... A second stimulus simply is not in the cards.

If there is going to be more aggregate demand, it can come from only one place. That place is not Europe or Japan, where debts are even higher than in the US – and the demographic preconditions for servicing them less favorable. Rather, it is emerging markets like China.

The problem is that China has already done a lot to stimulate domestic demand... As a result, its stock market is frothy, and it is experiencing an alarming property boom. ... Understandably, Chinese officials worry about bubble trouble.

The obvious way to square this circle is to spend more on imports. China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the US. Directing spending toward imports of capital equipment would avoid overheating China’s own markets, boost the economy’s productive capacity (and thus its ability to grow in the future), and support demand for US, European, and Japanese products just when such support is needed most.

This strategy is not without risks. Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth. And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend. But these are risks worth taking if China is serious about assuming a global leadership role.

The question is what China will get in return. And the answer brings us back, full circle, to ... US fiscal policy. China is worried that its more than $1tn investment in US Treasury securities will not hold its value. It wants reassurance that the US will stand behind its debts. It therefore wants to see a credible program for balancing the US budget once the recession ends.

And, tough talk notwithstanding, the Obama administration has yet to offer a credible roadmap for fiscal consolidation. ... We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own. ... Only by working together can the two countries lead the world economy out of its current doldrums.

I don't think we should count on this happening.

    Posted by on Friday, July 24, 2009 at 12:06 AM in China, Economics, Fiscal Policy | Permalink  Comments (16)


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