Ending China’s trade surplus will be great for the world


From Martin Feldstein’s The End of China’s Surplus:

The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.

Although this scenario might now seem implausible, it is actually quite likely to occur. After all, the policies that China will implement in the next few years target the country’s enormous saving rate – the cause of its large current-account surplus.

The plan calls for a shift to higher real wages so that household income will rise as a share of GDP. Moreover, state-owned enterprises will be required to pay out a larger portion of their earnings as dividends. And the government will increase its spending on consumption services like health care, education, and housing.

These policies are motivated by domestic considerations, as the Chinese government seeks to raise living standards more rapidly than the moderating growth rate of GDP. Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate. And with that lower saving rate will come a smaller current-account surplus.

This is the right policy direction for China (i suggested it in the past here and here) and the world economy will benefit from it.

Another report from a China based economist: China’s shrinking surplus.

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