China Setting the Stage For the Next Economic Crisis

The Chinese economy is largely export-oriented, and the giant governmental recovery plan follows this trend. However, as noted by William Duval of Alternatives Economiques, this will cause European and United States trade deficits to worsen. What to do?

Barack Obama was in China last week for his first visit to what has become the preferred partner, both politically and economically, of the American superpower. Iran, Afghanistan, North Korea, Copenhagen . . . many difficult issues were on the table, but none has seen significant progress. This is especially true of Chinese currency revaluation.

In recent years, the growing trade surplus of China’s economy has mirrored the growing U.S. deficit. This is one of the root causes of the crisis from which we may be slowly recovering: Americans have become increasingly and excessively indebted as they consume more than they produce, covering the difference with Chinese money – money the Chinese lend them because, they, on the other hand, increasingly consume less than they produce.

For now, China, with its 1.4 billion people, still has the economic structure of a “small country,” closer to that of the Netherlands than to that of the U.S. or Europe. In the U.S. or Europe, foreign trade amounts to about 20 percent of the gross domestic product (GDP), while in China it is over 80 percent. In order to rebalance the global economy and, thus, limit the risk of a future crisis, it would be necessary for the Chinese economy to reorient itself and give greater priority to its domestic market.

However, that is a far cry from the path chosen by Chinese authorities. The fantastic recovery plan launched in early 2008, which registered some success in the short term, is essentially a recovery plan to boost Chinese exports. It was particularly associated with a policy to re-anchor the yuan, the Chinese currency, over the dollar, though in previous years Chinese authorities had allowed some degree of currency revaluation. In addition, this is while the dollar is still falling against other currencies, the euro in particular.

Clearly, the export industries lobby is infinitely more powerful in Beijing than that of the Chinese peasants of the interior, who would also love to benefit a bit from the country’s growth and finally have a health system that works, mechanisms of social protection, etc. It must be said that China has the extraordinary situation of being both the last major Communist dictatorship in the World and an ultra-liberal paradise where free trade unions are banned . . .

On the occasion of Barack Obama’s visit to China, many voices highlighted the magnitude of the threat posed by China’s recovery strategy to the global economy and urged the U.S. president to be firm on this issue. This was particularly the case of Nobel laureate and U.S. economist, Paul Krugman, in one of his columns for the New York Times. Dominique Strauss Kahn, head of the International Monetary Fund (IMF) also reiterated his call for a revaluation of the yuan.

As usual, we can only deplore the total absence of European authorities in this important debate concerning the post-crisis environment: Europeans, who each court the Chinese authorities to win contracts for their national champions, are totally unable to define a common position on this issue, as on many others. This, despite the fact that the trade imbalance of the [European] Union vis-à-vis China is becoming more important than that of the Americans, due to pressure from the rising euro against the dollar, and, therefore, the yuan . . .