A LETTER arrived at the White House a day or two ahead of China’s president-in-waiting this week. The letter condemned China for its big trade surplus, which it blamed on the country’s cheap currency, among other economic sins. It was written by Sherrod Brown, a senator from Ohio, who sponsored a bill passed by the Senate in October that would impose tariffs on countries that undervalue their currency.
But is China’s currency still undervalued by the Senate’s own definition? The bill relies on the IMF’s methods (it has three) to identify offending exchange rates. In his letter, Mr Brown referred to one IMF calculation showing that the yuan was undervalued by 23%. That estimate, made in September, was based on the exchange rate required to bring the country’s notorious current-account surplus into line with the “norm” for a country like China. The IMF has not said officially what that norm should be, but one study suggests it is about 2.9% of GDP.
The corollary of a cheap currency is a large current-account surplus. It is therefore notable that China’s surplus narrowed to less than 2.8% of GDP in 2011, according to figures released last week (and to only 2.5% in the fourth quarter of that year). It was the smallest surplus (relative to the size of China’s economy) since 2002. Even in absolute terms, the $201 billion surplus was the smallest since 2005.
China’s surplus may widen again, if its export markets recover and commodity prices fall. But some economists are looking forward to its disappearance. Nomura, a Japanese bank, has forecast a surplus of just 1% next year. Li Daokui of Tsinghua University in Beijing says that China’s trade surplus might turn negative within two years, though the bilateral surplus with America will no doubt persist, to the continued annoyance of rustbelt senators.
It does not mean that China-watchers can stop worrying about the country’s unbalanced economy, with its heavy reliance on investment and exports. The problem is that China’s narrower surplus reflects an unsustainable rise in investment (as a share of GDP) rather than in consumption. Its external imbalance has narrowed, but a big internal imbalance remains.
Even that imbalance may be diminishing, however. China’s official statistics show private consumption growing less quickly than the economy as a whole from 2001 to 2010. But they also show retail sales growing faster than GDP from 2008 to 2010. The discrepancy is partly because China’s retail-sales figures include some things they should not (such as government purchases and sales of chemicals and other wholesale goods), and miss out other things (like health care and other services), that are a big part of consumer spending. But several economists also believe the official figures understate private consumption.
To derive an alternative measure, Yiping Huang and his colleagues at Barclays Capital, an investment bank, have tried to pick out those retail sales that are likely to reflect consumer purchases. He has combined those purchases with sales figures for service firms. By this alternative measure, consumption fell as a share of GDP until 2008, but started growing strongly thereafter. “Rebalancing of the Chinese economy has already started,” the Barclays economists conclude.
Not everyone is convinced. Nicholas Lardy, author of a new book “Sustaining China’s Economic Growth”, agrees that the official figures understate consumption, largely because they fail to capture the value of living in one’s own home. The understatement may also have worsened in the past five years. But this is not enough, he argues, to reverse the dramatic decline in private consumption as a share of GDP over the past decade.
Even official figures, however, suggest that China’s consumption ratio stopped falling last year, at least if government consumption is included. That is a turning point of sorts, which has so far garnered little notice. Perhaps someone should write another letter to the White House.
"The Ornament of a House is the friends who frequent it."
