The Changing Macroeconomics of Chimerica

Nouriel Roubini’s RGE Monitor today looks at China’s economic outlook and finds that with significantly slowed Chinese growth, the nature of the bilateral economic relationship that defined the world economy over the last several years — a high U.S. trade imbalance with China driven by U.S. consumption and Chinese saving — is inevitably changing:

. . . Despite the fact that China’s aggressive policy response included monetary easing, scaling up of bank lending and a particularly aggressive scaling up of government investment to offset the contraction in private demand, there is an increased risk that China will grow only in the 5-6% range year on year in 2009, about half its average growth of the previous five years, and well below potential. Such a growth rate would increase pressures on China’s government as the hard landing has been accompanied by job losses and factory closures as well as implying that Chinese commodity demand could continue to be lower than recent trends. . . .

. . . The structural reasons for high Chinese savings rates still persist. And with the Chinese yuan having returned to its implicit peg to the U.S. dollar, Chinese reserve accumulation and purchase of U.S. assets could again be quite strong in 2009. However, lower net hot money inflows could contribute to keep the pace of reserve accumulation below the one displayed in 2008.

But the gap between a very weak U.S. and global economy and the Chinese growth target of 8% for 2009 is wide and given the sluggish outlook for the U.S. and global economy, China may continue to grow below potential in 2010. There is also another important caveat: even once the U.S. economy recovers, it will rely less on consumption and imports and more on an improvement in net exports. The world where the U.S. was the consumer of first and last resort – spending more than its income and running ever larger current account deficit – and where China was the producer of first and last resort – spending less than its income and running ever larger current account surpluses – is changing.

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