The Central Role of China in the Global Imbalances - by C. Fred Bergsten
"China’s global current account surplus soared to about $250 billion in 2006, more than 9 per cent of its GDP. Its trade surplus has doubled again in the first quarter of 2007, suggesting that its current account deficit will exceed $300 billion in 2007—the largest ever recorded by any country. China has become by far the largest surplus country in the world, recently passing Japan and far ahead of all others. Its foreign exchange reserves have also passed Japan’s to become the largest in the world and now exceed $1 trillion, an enormous waste of resources for a country where most of the huge population remains very poor. About one quarter of all of China’s economic growth in the past two years has stemmed from the continued sharp rise in its trade surplus. China is thus overtly exporting unemployment to other countries and apparently sees its currency undervaluation as an off-budget export and job subsidy that, at least to date, has avoided effective international sanction.
These global imbalances are unsustainable for both international financial and US domestic political reasons. On the international side, the United States must now attract about $8 billion of capital from the rest of the world every working day to finance our current account deficit and our own foreign investment outflows. Even a modest reduction of this inflow, let alone its cessation or a selloff from the $14 trillion of dollar claims on the United States now held around the world, could initiate a precipitous decline in the dollar. Especially under the present circumstances of nearly full employment and full capacity utilization in the United States, this could in turn sharply increase US inflation and interest rates, severely affecting the equity and housing markets and potentially triggering a recession. The global imbalances represent the single largest threat to the continued growth and stability of the US and world economies.
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