China, America and Sustainable Recovery

While it would be nice to think that the Great Recession could turn into the Great Recovery this year, this Bystander thinks that the more realistic question is whether it can turn into the Sustainable Recovery. The answer to that turns perhaps more on the politics of the leading developed and developing economies more than anything else with both Washington and Beijing going — in their different ways — into an election season.

That is not to say the economics is unimportant, or the macroeconomic policy management necessarily easy. Economic growth everywhere has yet to be weaned off the milk of government largesse. Demand in the developed and indebted economies remains weak while asset bubbles threaten even well-run emerging economies. The very scale of China’s stimulus and the abundance of liquidity in the economy makes it the focal point of the bubble worrywarts.

How and when monetary policymakers tighten is as tricky and crucial a decision for Beijing as the one facing Washington’s policymakers over fiscal tightening: too much too soon in China could just attract an inflow of bubble-inflating speculative money from the rich world, while too much too soon in the U.S. could prematurely choke off the fragile recovery in the developed economies.

Which is just one point where politics start to creep in. China’s dogged refusal to allow its currency to appreciate is not so much because Beijing wants to keep favoring its exporters with the advantage of a cheap currency and to hold back the necessary reorientation of the economy towards domestic demand that a revalued yuan would encourage. Quite the contrary. But its leaders dare not risk the short-term dislocation this would cause as the economy adjusted.

For one, the Party’s legitimacy overall depends on continuing to deliver economic growth; for another with its factions now jockeying for position in the run-up to the succession to the Hu-Wen leadership in 2012, all factions are potentially at risk of disadvantaging core constituents if existing economic distortions are eliminated. Switching individuals from savers to spenders isn’t the problem; it is doing that with state-owned enterprises with all the untangling of political connections and patronage that would entail. That has lead to an effective political moratorium over currency and other economic modernization reforms.

Which is where the political dimension stretches into America and its midterm election due towards the end of this year. Yuan revaluation is a hot button for the China hard-liners in Washington (and increasingly in Brussels: Americans have seen their currency ‘hold’ against the yuan even as the dollar has fallen; Europeans have taken a double hit as the yuan has ridden down against the euro on the dollar’s fall).

But even in Washington that galls; a fast growing economy with the world’s largest current-account surplus should be seeing its currency rising, and fewer and fewer in Washington are buying Beijing’s line that the yuan’s value is nobody’s business but China’s. While protectionist spirits in the U.S. have largely been kept in check during the Great Recession persistent unemployment is emboldening them–witness the recent tariffs imposed by the U.S. on tires and steel, economically pretty irrelevant but politically hugely significant. Add in some popular paranoia over China becoming the No 1. exporter, and it all makes for a potential bumpy year.

2 Comments

Filed under China-E.U., China-U.S., Economy

2 responses to “China, America and Sustainable Recovery

  1. Bill

    I don’t know about Washington, but Beijing has certainly the right formula for sustainable recovery.

    It is obvious that the Chinese recovery is driven mostly, if not only, by government spending in investment and consumer incentives. Since China has a bottomless pit of money in the zillions, China can keep on spending on investment and incentives forever. And that is sustainability with full control. As long as the Chinese government has the will to keep on stimulating the economy, the Chinese economy can go on expanding forever.

  2. At some point the inexorable laws of supply and demand catch up with even Beijing’s planners. — CB

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