Chinese authorities have used massive state support to expand strategically important industries like battery and EV production - STR/AFP via Getty Images
We all know that China is a strategic rival to the United States and poses a threat to the West in general across a broad front.
It has supported Russia both politically, militarily and economically. It has infiltrated western institutions and it threatens to undermine the democratic process. And there is continued tension over Taiwan.
Yet China also poses a threat in straightforward economic ways. The US Treasury Secretary, Janet Yellen, travelled to Beijing this month to discuss a range of subjects.
The meeting was apparently friendly and Sino-American relations are evidently much better than they were a year ago. But China is continuing to run an extremely unbalanced economy with major consequences for the world.
The Chinese economy is now on a much lower growth path than it used to be.
Nevertheless, since the end of 2019, its industrial output has risen by about 25pc. Moreover, its trade surplus in goods has exceeded £800bn in each of the past two years. That is the equivalent of about 1pc of the GDP of the world (excluding China), twice as large as it was just before the financial crisis in 2007.
Meanwhile, consumers’ expenditure still accounts for less than 40pc of China’s GDP – lower than in the year 2000, when it stood at 46pc.
By contrast, in the US, consumers’ expenditure accounts for about 70pc of GDP. In most developed countries – including the UK – it lies somewhere between 60pc and 70pc.
The Chinese authorities have used massive state support to expand key industries that they regard as strategically important, including batteries, high-end electronics and electric vehicles.
As Janet Yellen noted, a further export surge by Chinese businesses in these industries threatens to wipe out many companies in the US and elsewhere.
This concern is thoroughly understandable. There are undoubtedly some serious strategic and security issues at stake here.
But there is also another issue that is plain vanilla economic. In principle, there is nothing wrong with the idea of Chinese industrial output booming or China selling large amounts of goods around the world.
The problem lies with the fact that it doesn’t buy anything like an equivalent amount in return, resulting in its massive trade surplus. What needs to happen is not some self-denying ordinance to reduce China’s exports, but rather a policy shift to increase its imports.
Most economists would think China’s enormous trade surplus was bizarre. Although Chinese people, on average, have enjoyed a massive increase in living standards over the last 25 years, they still remain relatively poor compared to those in Europe and America. You would think that Chinese policy-makers would take steps to boost consumption. This would have the side-effect of increasing China’s imports and reducing her trade surplus.
Why don’t the Chinese authorities act in this way? They see China’s interests as best served by continuing to invest a huge proportion of GDP in order to ensure future strong growth of the economy. Fair enough.
But alongside this, persistent current account surpluses result in the accumulation of financial assets in the form of claims on western countries. This is also a sort of investment. The Chinese authorities probably see this as boosting China’s power and security, although they are dismayed about having so much money tied up with China’s adversaries.
Quite apart from the security issues, should the countries of the West regard China’s surplus as a problem or should we just lie back and enjoy it?
After all, China’s burgeoning exports have been a major influence in keeping inflation down and thereby helping to boost the living standards of the average western worker. The price of the typical Chinese export is now more than 10pc lower than it was a year ago.
But this reduction in inflation comes at a price. Without offsetting action, Chinese trade surpluses tend to depress aggregate demand in the West and thereby threaten to deprive Western workers of jobs and incomes.
Given the policy objectives of central banks and governments, they have responded by trying to keep aggregate demand in line with potential output and thereby to keep employment high. This has been a leading factor behind the long period of very low interest rates, as well as the prevailing trend for loose fiscal policy.
Concern about global imbalances was all the rage at the time of the financial crisis in 2007/9 but it has faded since, as the world economy has been dominated by the effects of the pandemic, Russia’s invasion of Ukraine and the upsurge of inflation. But the issue is just as relevant today.
You might well think that as long as western policy stimuli are effective, we can forget about China’s trade surpluses. But a long period of supportive monetary and fiscal policy has its costs.
Ultra-low interest rates have boosted asset prices, leading to all sorts of distortions. Meanwhile, loose fiscal policy has resulted in a build-up of government debt which poses a serious challenge for the future. And all the while, countries that are running large current account deficits are diminishing their wealth stock, just as China is building up its own.
In fact, China is far from being the only country in this position. As a percentage of GDP, Singapore and Hong Kong run much larger surpluses.
Within Europe, Germany, the Netherlands, Norway and Switzerland also run huge surpluses. Indeed, Europe’s collective surplus exceeds China’s, at least on the official Chinese measure, although not when properly accounted for. The origins of Europe’s large collective surplus lie partly with the workings of the euro.
The preparedness of both the United States and Europe to accept continuing huge Chinese trade surpluses is surely waning.
President Biden last week called for a tripling of tariffs on Chinese steel. If Donald Trump returns to the White House, punitive tariffs would be imposed on a broad swathe of China’s exports. This could herald the beginning of a bout of protectionism around the world.
Roger Bootle is senior independent adviser to Capital Economics. roger.bootle@capitaleconomics.com
