Rising china poised to become next 'Investor to the world'
In its next evolution the global economic system is likely to be driven by Beijing's need to invest massively to sustain growth, including in desperately needed infrastructure projects in the US that could help revitalise the American economy
Many analysts and observers believe that the global imbalances that characterised the world economy in the years before the 2008 crisis have substantially dissipated. But, while it is true that China's current-account surpluses and America's deficits have somewhat moderated since then, have the imbalances really been corrected? More importantly, can the post-crisis global economy enjoy both growth and balance?
To answer these questions, it is important to understand the imbalances' underlying dynamics. An economy's current account is the difference between its investment rate and its savings rate. In 2007, the United States had a savings rate of 14.6% of GDP, but an investment rate of 19.6%, generating a current-account deficit. By contrast, China had a fixed investment rate of 41.7% of GDP and a savings rate of 51.9%, reflected in a large surplus.
Since 2007, the US current-account deficit has narrowed, but not because of a higher savings rate. Rather, the external deficit has been squeezed by a collapse in investment activity, while America's overall savings rate has fallen below 13% of GDP, owing to worsening government finances. Meanwhile, China's savings rate remains stubbornly high. The surplus has narrowed because investment has been ramped up even higher, to roughly 49% of GDP. In other words, Americans save even less today than they did before the crisis erupted, and the Chinese invest even more.
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