China: I Divorce You

Marriages end when it the value of staying together is less than the grief of doing so. It works that way for economies as well.

Round and round it goes

Oct 22nd 2009
From The Economist print edition

America buys Chinese exports, China buys American Treasuries. Can it continue?

AT ONE stage it all seemed to be working, even if it appeared a little surreal. China, a developing country, lent vast amounts of money to wealthy America to feed its spending habit. Americans spent the money on Chinese-made goods, sending the dollars back to China, which lent them to America again. But now many talk of a decoupling of the two economies. Niall Ferguson, a Harvard historian who, only a couple of years ago, popularised the term “Chimerica” for the symbiosis between the two, now says it is a marriage headed for the rocks.

China’s export figures appeared to support the idea that the country depended hugely on overseas markets for its growth, and on America in particular. By 2007 the value of China’s exports amounted to about 36% of its GDP, up from just over 20% in 2001. America was (and remains) second only to the European Union as a customer for Chinese exports, and by far the biggest single country. This year China is on course to regain its position as the biggest supplier of goods to the American market, overtaking Canada. And by September 2008 China had surpassed Japan as the largest holder of US Treasuries (see chart 1), in other words as America’s principal creditor.

But the marriage was not quite as close as the headline figures suggested. China certainly helped its exporters by keeping the value of its currency low, buying dollars that were used to buy US Treasuries. Those Treasury holdings helped keep American interest rates low and American consumers spending. But sustaining such growth in exports was not as vital to China as many assumed. The value-added component of its exports accounted for a much smaller share of its GDP than the gross figure because much of the value of Chinese goods consumed in America was created elsewhere. The biggest driver of growth in China was investment, and that has become all the more true as China tries to pump up its economy with nearly $600 billion in stimulus spending. So although China’s economy no longer enjoys the double-digit growth rates of a few years ago, it is on course for 8% growth this year and a similar rate next year, says Nicholas Lardy of the Peterson Institute for International Economics in Washington, DC, even as America’s economy is still trying to emerge from recession.

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