Do the data support Krugman’s China bashing?

From The Economist:

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

From Beijing, things look rather different. China’s merchandise exports have collapsed from 36% of GDP in 2007 to around 24% last year. China’s current-account surplus has fallen from 11% to an estimated 6% of GDP. In 2007 net exports accounted for almost three percentage points of China’s GDP growth; last year they were a drag on its growth to the tune of three percentage points. In other words, rather than being a drain on global demand, China helped pull the world economy along during the course of last year.

Foreigners look at only one side of the coin. China’s imports have been stronger than its exports, rebounding by 27% in the year to November, when its exports were still falling. America’s exports to China (its third-largest export market) rose by 13% in the year to October, at the same time as its exports to Canada and Mexico (the two countries above China) fell by 14%.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.

We don’t need to go half way around the world to find a big country that isn’t pulling it’s weight. 

PS.  In some Keynesian models of “depression economics” (aka “incompetent monetary policy economics”) saving is a “bad thing.”  In fact, we need a fiscal policy that is much more pro-saving, and a monetary policy that sharply boosts NGDP.



12 Responses to “Do the data support Krugman’s China bashing?”

  1. Gravatar of Interview with Eugene Fama | Auto Insurance Interview with Eugene Fama | Auto Insurance
    17. January 2010 at 17:01

    […] TheMoneyIllusion » Do the data support Krugman's China bashing? […]

  2. Gravatar of Doc Merlin Doc Merlin
    17. January 2010 at 22:10

    1. Saving being a bad thing comes from their model that doesn’t understand profits/losses. Individual savings when they are from increases in efficiency are very much like corporate profits and result in more spending later.

    2. Savings can be bad if it is a result of a shortage of things that people want to buy.

    3. Savings can also be a symptom of something bad, if the reason people are saving is because of increased uncertainty or negative future expectations due to bad governance.

    4. I think that China’s fiscal policies are going to bite it in the ass shortly, however with their savings rate and growth rate, they can afford the policies more than we or the Europeans can.

  3. Gravatar of malavel malavel
    17. January 2010 at 23:12

    Over the last two years.

    Why isn’t he complaining about the ECB depreciating the Euro?

  4. Gravatar of OGT OGT
    18. January 2010 at 05:22

    Malavel- Because the ECB doesn’t have capital controls or a pegged currency. They do have too tight of a monetary policy, however, which I believe Krugman has criticized.

    I think Scott’s position on China would be more defensible if the Chinese Central Bank hadn’t just started tightening monetary policy, while leaving it’s currency pegged.

  5. Gravatar of ssumner ssumner
    18. January 2010 at 12:37

    Doc merlin. “bite it in the ass?” that’s not very specific.

    malavel, good point.

    OGT. But by Krugman’s logic, the euro should be higher, which would require even tighter money from the ECB. Don’t we run a trade deficit with Europe? And their currency has depreciated over the last 2 years.

    You second point is a good one. I think the Chiense will start appreciating the yuan at some point during 2010, so I am not too concerned. Their overall economy is stronger, but exports are still very weak. But I am certainly not trying to defned everything they do, rather merely arguing they aren’t the cause of our problems, and actually helped the world in net terms last year.

  6. Gravatar of Doc Merlin Doc Merlin
    18. January 2010 at 20:18

    Well, I guess I can be a lot more specific about what I believe will happen in China. China has been using massive amounts of government spending and stimulus to keep itself out of recession. This is going to build massive malinvestments then when some pressure is applied to remove the malinvestments, they will have a massive recession. China with its huge savings rate may be able to weather it better than most, but their government’s behaviors will eventually catch up with them.

    I am generally positive on China’s move towards a free market, and as usual think that Krugman is opposite of the truth. However I do think that China has made serious mistakes in its stimulus spending that will harm it.

  7. Gravatar of Doc Merlin Doc Merlin
    18. January 2010 at 20:20


    “Why isn’t he complaining about the ECB depreciating the Euro?”

    Because Krugman very rarely criticizes europe when comparing it to any country jumping into the free market enthusiastically.

  8. Gravatar of Jim Jim
    18. January 2010 at 23:41

    Has Krugman lost it? No really.

    The other possible explanation seems to be this crazy virus that invades all NYT writers. Brook and Friedman are also infected, and of course most of the others came down with it years ago.

  9. Gravatar of scott sumner scott sumner
    19. January 2010 at 19:02

    Doc Merlin, How do you “remove” investments like high speed rail lines, airports and highways?

  10. Gravatar of Doc Merlin Doc Merlin
    21. January 2010 at 21:13

    I wasn’t referring to them, but to their massive spending in US commercial real estate, financial investments and such. Those markets are going to tank, and it is going to trigger a massive recession.

    As for durable public investments like roads and such, they won’t cause a problem in China unless their upkeep costs become higher than their utility, as China’s government isn’t very indebted (only 18.4% of GDP.)

  11. Gravatar of scott sumner scott sumner
    23. January 2010 at 06:30

    Doc Merlin, Does China have massive investments in US commercial real estate?

  12. Gravatar of Doc Merlin Doc Merlin
    24. January 2010 at 14:02

    Yes, Scott.

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