The venerable New York Times editorial page mangled a basic fact a couple of days ago (“As China Goes, So Goes …,” October 27). I take the time for this nit-picking not just because some of us expect the American newspaper of record Times to get everything right, but because the correction may be illuminating.
Here’s what the Times said: As the rest of the world “tips into recession,” China should give up its “old export strategy” and reorient its economy in the direction of satisfying domestic demand. The Times argued that “by raising Chinese imports and reducing its dependence on exports, it would also help the rest of the world” while reducing its own “overwhelming” vulnerability to changes in world markets. The key is to “unlock the savings of its citizens and encourage them to spend.” To facilitate that, China should step up public works, reduce taxes on housing and rebuild the tattered social safety net. Doing so wouldn’t be that difficult, The Times suggested, because Beijing is “running a huge budget surplus.”
The advice to the Chinese is basically sound and certainly welcome. The basic problem I see with it is that China’s new-found budget surpluses are not “huge.” After years of running budget deficits, China has in the past two years run modest surpluses on the order of one percent of its GDP – about $23 billion of black ink at current exchange rates. Compared to America’ s going-on-one-trillion dollar deficit, that might sound like the promised land. But a social safety net for 1.3 billion people cannot be stitched together for such paltry sums.
What is huge – and I suspect what the Times meant to say – are China’s official foreign exchange reserves. China admits to having over $1.9 trillion, the largest in the world and far in excess of what it or any other country would need. As impressive as that figure sounds, it’s just the beginning of the story. When you include China’s sovereign wealth fund, its social security investment fund, and unknown quantities squirreled away in China’s state-owned commercial banks, the available hard currency surely approaches 2.5 trillion dollars. A trillion here, a trillion there, and pretty soon you’re talking about real money, as Everett Dirksen might say. China could use a portion of these vast sums to build safe schools, rebuild its health care system, accelerate urbanization, clean up its polluted water supply, put scrubbers on every coal-fired power plant – and more.
But it’s not just the size of the funds that matters. Consider the differential economic impact of budget and current account surpluses. A budget surplus is based on tax revenues in excess of expenditures; the government taking out of the economy more than it puts back in. A current account surplus comes from surpluses in trade, foreign investment and other international payments; more local currency goes into the economy than goes out. While a budget surplus is deflationary and helps to cool an overheated economy, the current account surplus is inflationary and helps ensure an excessive reliance on exports and too little domestic consumption – the very problems The Times correctly wants China to solve.
Better advice to China would start with a substantial revaluation of its currency. That would move China’s import and export prices more in line with their real value and allow market forces, as imperfect as they are in China, to reshape its economy in ways that have thus far eluded Beijing’s bureaucrats.