context: The debate of 'global imbalances' have resurged, with the US running a rare 'twin deficit' in both its current account and net international investment position while the PRC's share of global trade surpluses hit a record high. A steadily stronger RMB is suggested by some as a potential solution, but a stronger currency depends on reviving weak consumer demand amid a property downturn, which would take time to realise and could also squeeze exporters.
Lu Feng 卢锋 Peking University National Development Institute deputy director shares his insights on 'global imbalance' and PRC response, noting
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- global imbalances tend to emerge when great powers are catching up
- past spikes coincided with the US overtaking Britain and Japan catching the US
- currently, the US side carries a new kind of risk
- its current account and net investment position deficits are rising together
- the deficits are driven by a stock boom and growing foreign equity holdings rather than goods trade
- a market correction could trigger a 'sudden stop' in capital inflows
- Beijing needs to brace for these external shocks
- its current account and net investment position deficits are rising together
- the PRC's external balance has entered a new phase of surplus
- it now accounts for a record share of global surpluses, especially in manufactured goods
- as a share of GDP, though, it remains well below the pre-2008 peak
- Lu offers a complementary perspective from the mainstream take: productivity catch-up and a lagging real exchange rate
- Western commentators mostly emphasise the PRC's savings-investment gap, social security, and the 'macro-industrial policy'
- rapid manufacturing productivity gains should, theoretically, push the real exchange rate up and curb the surplus
- in practice, real appreciation has been limited, and recent real depreciation has widened the surplus
- both external and domestic factors have held the real rate back
- externally, high inflation in the US and Europe has lifted their real rates
- domestically, the property downturn, resource allocation tilted toward supply, and weak demand with low prices have dragged on it, as have capital outflows
- although early signs of repair have appeared over the past year
- Lu pushes back on 'currency manipulation' claims
- the PRC has a weak real exchange rate, which reflects how prices in the PRC compare with those abroad, which Beijing cannot set directly
- the RMB's recent dip in nominal terms came from money flowing out of the PRC
- unlike the early 2000s, when the PRC tied the RMB to the dollar and piled up reserves
- fixing it means lifting domestic demand and reforming the economy, which takes time, rather than tweaking exchange rate policy alone
- multilateral coordination offers limited help
- the standard recipe (US fiscal consolidation, PRC boosts consumption, EU increases investment) is worth supporting but should not be relied upon
- large economies' own domestic adjustment is more likely to work
- the way forward is proactive rebalancing
- stick to the 15th 5-year plan's domestic demand anchor and tackle 'strong supply, weak demand'
- success would see the real rate resuming appreciation, reduce reliance on external demand, and make growth more sustainable
- as a large economy, the PRC can actively shape its external environment
- global imbalances tend to emerge when great powers are catching up