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Looking for a new balance with China?
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Today, about half of China's GDP is devoted to investment and to producing net exports for the rest of the world, and thus only the remaining half is available for consumption, including government consumption. In particular, household consumption in China last year was only 38 percent of GDP, down from 45 percent in 2001. In comparison, household consumption was about 60 percent of GDP in India in 2004, according to the most recent available data. China's low share of consumption in GDP is, of course, the counterpart of its high national saving rate.
Policies aimed at increasing household consumption would clearly benefit the Chinese people, notably by improving standards of living and allowing the fruits of economic development to be shared more widely. Such policies, by reducing saving and increasing imports, would also serve to reduce China's current account and trade surpluses.
According to Ben Bernanke, Chinese policy-makers risk losing control of their economy unless they let the yuan rise in value and strengthen their financial system.
"Monetary policy may be constrained by the lack of a reliable monetary transmission mechanism and by the relative inflexibility of the exchange rate, which inhibit the central bank's ability to keep inflation low and to stabilize the economy," Bernanke said in remarks prepared for delivery to the Chinese Academy of Social Sciences in Beijing.
But Bernanke stressed that a freer-floating yuan, also known as the renminbi (RMB), was very much in China's self-interest.
"More flexibility in the RMB would have important advantages. Forget about the rest of the world: it would have important advantages for China. Without having flexibility in the exchange rate, China cannot have an independent monetary policy," he said in answer to a question after his speech.
A stronger yuan, combined with a wider trading band and with the ultimate goal of a market-determined exchange rate, would allow an effective and independent monetary policy and thereby help to enhance China's future growth and stability.
Also, perceptions that the yuan is undervalued could fuel additional capital inflows as investors bet on a rise in the yuan, he added. Speculative inflows would in turn increase the need for greater exchange market intervention and bond sales.
China also faces distortions in the allocation of capital from an undervalued exchange rate and an underdeveloped financial system.
"The principal imbalance lies in the composition of Chinese GDP (gross domestic product), which is heavily tilted toward investment and net exports and away from domestic consumption and government provision of social services," he said.
The positive economics here is impeccable, but the normative economics is open to debate.If a friend of yours is saving a high fraction of his income, how can you tell him he is saving too much without knowing his personal rate of time preference and his desire for precautionary savings? Judging another person's saving rate is difficult. Judging another nation's saving rate cannot be any easier. |
| Tarih
: 18.12.2006 |
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© 2006 Mert TOKER All Rights Reserved. |
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