Tuesday, 15 January 2008

More on China's trade surplus

As always, an excellent post by Michael Pettis. His well written posts save me a lot of work as he always identifies the points and accurately describes them in a technical but still accessible manner.

His blog is certainly the best blog that covers China economics.

The cause of China’s trade surplus [China Financial Markets]

Prime Minister Manmohan Singh is currently visiting China and yesterday he too complained about China’s trade surplus. There is still a debate about the structure of China’s balance of trade. There are at least three reasons commonly cited to explain China’s massive trade surplus.

Read the post to get the three reasons. Pettis concludes:

It may already be too late to adjust easily, and even if it isn’t if the authorities are too wedded to the ideology of gradualism to make a rapid adjustment, so in this case I expect that the end game will occur either in the form of runaway inflation, which would eventually cause a sharp contraction in the money base, or in the form of sharply rising inventory leading to equally sharp cuts in production, which is how overinvestment cycles classically ended in the 19th Century.

I tend to agree. The adjustment costs will be severe. China is not sufficiently developed to withstand a deep crisis and the implications may be very serious.


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