Peter Schiff, as ever, has a nice take on an argument that I have heard expressed from various commentators in recent years and months: China saves “too much” and its “excessive” savings are the source for all this Western borrowing – and now the financial SNAFU – so Chinese folk need to get their wallets out, spend more, be less frugal, so that this “imbalance” in the world economy can be corrected.
Schiff gives this line of thinking fairly brutal treatment, but as he says, there is also some truth in it. Because China’s exchange rate is kept artificially low against the dollar and other currencies, Chinese exports are cheaper in Western markets than they would otherwise be; this means that in turn, China earns large amounts of foreign exchange, which in turn get invested in things like Western government debt securities, such as US Treasuries. This buying of Western debt like Treasuries has enabled Western consumers to enjoy credit for cheaper than otherwise would have been the case, fuelling the credit boom, etc. Of course, what this line of thinking tends to overlook is that if Chinese savings are based on real earnings, and those earnings are being invested in Western productive assets, then how is this a problem? Consider: part of the 19th Century, the UK invested enormous sums of its capital in places such as Argentina, the US, Canada, Australia, India, and so on. This export of capital was entirely benign as it generated long term returns based on real investments. Would it have been better had this process not happened?
I agree with Mr Schiff that the Chinese yuan will float freely eventually; when it does so, Chinese exports will be more expensive in Western markets, while Chinese consumers will be able to buy more Western goods, and so the “problem” of all this surplus capital will disappear or be less pronounced. The “imbalance” will begin to rectify itself, given the chance. And that means the West will have to rely more on its own savings to generate investment in the future. The question, of course, is whether the tax and regulatory climate makes that process happen smoothly or not.
There have been many different explanations of what has gone awry in the world economy in recent years, and of course any search for an explanation cannot ignore China and the impact of its own policies. But it strikes me as unjust to put China in the dock. The prime driver of the crisis has been Western monetary incontinence, a largely home-grown force.