The US Treasury Secretary Tim Geithner offered a wearily familiar analysis of what's wrong with America's economic relationship with China in his speech to an audience at Peking University yesterday, but as the Chinese become ever more concerned about the safety of their vast portfolio investment in America Inc, little in the way of solutions. Still, at least he managed to sound upbeat about the US economy, comments confirmed by the latest data yesterday, as well as avoid some earlier faux pas.
There is nothing more guaranteed to infuriate the Chinese political leadership than blaming Asia for an economic crisis which the Chinese lay firmly at the door of failings in US and European banking regulation. Mr Geithner made just such a diplomatic blunder when he first became Treasury Secretary. This time around, he was more careful in his choice of language, even though he again referred to the need for a more rapid currency adjustment than the Chinese are allowing. Yet the fact remains that the chief underlying cause of the credit bubble was the growth in trade imbalances, of which the one between China and America was and still is the most conspicuous.
For the past two decades, China has followed a well worn, export-led path to development. This, in turn, has relied heavily on American consumption. As the trade surplus grew, so did the offsetting capital imbalances. It's a funny old world that has some of the poorest people in the world lending some of the richest the money to buy their goods, but that is essentially what was happening.
For the time being, Mr Geithner and his counterparts in China have little option but to continue with this imbalanced approach to economic advancement. US economic policy is hell-bent on trying to revive American consumption, though at a fiscal cost that the Chinese fear will inflict terminal damage on their investment in US treasuries.
As in Britain, an unsustainably large fiscal deficit is being established as public debt is expanded to compensate for the shrinkage in private credit. It is what Mervyn King, the Governor of the Bank of England, has called the "paradox" of policy – that, for the moment at least, the approach has to be the exact opposite of the one judged appropriate for the long term. Yet, once the economic recovery is firmly established, Mr Geithner promises to move towards a more balanced, sustainable growth model, which for the US means a rising savings rate and less dependency on consumption for economic advancement.
China, on the other hand, requires "a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption". In other words, the two countries need to reverse their present positions; China needs to consume more and America less.
This is easier said than done. The G20 communique after the London summit two months ago failed to mention the issue at all, such is its sensitivity. As Chinese wealth increases, so does Chinese consumption (new car sales jumped by a quarter in February which, set against the miserable decline in sales almost everywhere else, looks positively stellar). But there are myriad different barriers to the kind of increases in domestic demand that would produce the looked for correction in trade imbalances any time soon.
The most important of these is Henry Ford's famous observation that if you want to expand domestic demand, you have to pay your workers well enough to buy the goods they are producing. Manufacturing that relies on external demand to sustain itself is incentivised to pay its workers as little as possible so as to keep costs to a bare minimum. What us required in China is something similar to Ford's pledge in 1914 to start paying his workers $5 a day, which was more that double the average in the automotive industry at the time. Yet there is very little chance of this happening in China on the scale necessary to bring about the necessary transformation in consumption.
Even taking the three big surplus nations of China, Germany and Japan together, consumption doesn't come close to matching American domestic demand, depressed as it is by the economic downturn. The average Chinese worker simply doesn't have the money to buy the ties, washing machines and television sets he is producing, let along something as expensive as an automobile. Weaning America off its addiction to debt fuelled consumption may prove equally difficult.
The bottom line is that the Chinese don't yet believe they are ready to give up their export-led growth while, despite the rhetoric of the Obama administration, it would be all too easy for the US to slip back into the bad old ways of living beyond its means. Indeed, right now, America is living more beyond its means than ever. What signs there are of recovery in the US are based on a revival in consumer confidence fed by zero interest rates. Meanwhile, yesterday's encouraging economic data from China has little to do with growing domestic consumption, but rather seems mainly down to a slight revival in exports and the effects of the stimulus package on public investment. Both economies are reverting to type.Reuse content