A domestic spending surge is the best thing for China
What exchange rate regime should China adopt? The answer must be: one that supports stable growth at home and, given China's growing role in the world, also abroad. The government has already decided to shift towards greater reliance on consumption. In doing so it has willed the end. Now it must will the means.
Nicholas Lardy of the Washington-based Institute for International Economics spells out the case for such a shift in a thought-provoking new paper*. This represents just one of the host of contributions made by the Institute to the greater understanding of international economic policy issues over the past quarter of a century. I do not agree with everything it has published. That is hardly surprising. But the world would have been far worse informed and less stimulated without it. Happy birthday, IIE!
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Lardy's contribution is a superb example. All, he argues, is not as healthy in the economy as headline statistics suggest. Between 2001 and 2005, investment generated a little more than half of the expansion in aggregate demand. More recently, the current account surplus has exploded from 1.3 per cent of gross domestic product in 2001 to 7.2 per cent last year and a forecast of 9.1 per cent this year (see chart). As a result, net exports of goods and services generated a quarter of additional demand last year and will generate another fifth this year. The current Chinese economic expansion is evidently both investment- and export-led.
What is wrong with that? One answer is that the leadership itself considers it problematic. In December 2004, it agreed to shift towards consumption-led growth. It did so, suggests Lardy, for good reason.
First, China's investment has soared to more than 40 per cent of GDP. This is much higher than in other fast-growing east Asian economies at a comparable stage of development (see chart).
Second, a symptom of inefficiency is excess capacity: in the case of steel, China's unused capacity exceeded Japanese output in 2005.
Third, this capital-intensive growth has generated rapid increases in the demand for energy and low growth in employment. The latter ran at only 1 per cent a year between 1993 and 2004.
Fourth, increased investment may lead to yet another round of non-performing loans in the banking sector, undermining efforts to create a market-oriented financial system.
Finally, the expansion of net exports risks generating a backlash, particularly in the US. China is too big to rely on export-led growth.
To this list should be added the most important point: China should raise the currently low levels of consumption of the people. In 2004, notes Lardy, China's GDP per head was two and half times that of India (at market prices), while household consumption was a mere two-thirds higher.
Can Chinese policymakers raise the share of consumption (and so lower the share of saving) in GDP? The answer is "yes". One can debate the balance between government and corporate savings in today's China. But there is little doubt that they contribute about two-thirds of total savings, together. China's government could easily borrow and spend more. It could also impose dividend requirements on state-owned enterprises, forcing them to borrow, while spending the proceeds itself.
In the short to medium term, the best policy would be to increase the government's spending on health, education, welfare and pensions, particularly in the poorest areas of the country. In practice, however, as Lardy shows, the government's moves towards higher spending have been far too timid. Given the country's savings surplus, what is now needed is additional spending of well over 5 per cent of GDP.
This brings us to the question of the exchange rate. The starting point is whether such an increase in spending would be expected to raise the real exchange rate - that is, raise the prices of non-tradeable services relative to those of tradeables (as discussed in last week's column). In most economies, the answer would be yes. Given China's abundant supply of labour and massive investment rate, it may conceivably not be. A reallocation of investment towards less capital-intensive service activities may be all that is needed.
It would be sensible, therefore, to start by expanding spending without worrying about an immediate change in the exchange rate, which may prove unnecessary. Suppose, however, that the increase in consumption did, in practice, start to generate inflationary pressure. Then the government could either tolerate the higher inflation and keep its present tight control on appreciation of the currency or allow a faster rate of appreciation and keep inflation under control. Inflation and appreciation are simply alternative ways of generating a needed change in relative prices of non-tradeables and tradeables.
In essence, the government must decide whether the exchange rate or the price level would be a better anchor for expectations. In the longer run, the second option looks right. As China develops a bigger and more sophisticated economy, it will want an inflation-targeting central bank and a floating exchange rate. But in the short run, China could keep a relatively rigid nominal exchange rate and accept higher prices. But the overheating of the economy that would result could be quite costly.
The starting point is not the exchange rate, but domestic spending. Moreover, the principal aim of the extra spending would not be to accommodate political pressures from abroad, but to use China's resources more efficiently at home.
Yet, suppose China did indeed expand demand and so shrink its current account surplus. Would that change the global pattern of "imbalances" (see chart)? Possibly not. The shift might merely lead to larger surpluses elsewhere rather than smaller US deficits. But, by increasing domestic spending, the Chinese government would at least be doing what it could to release the external pressure upon it.
This policy would be in the interests of the Chinese people themselves. But it would also be in the interests of a better balanced world economy. Given China's currency reserves of around $1,000bn, it would be riskless. The Chinese government has decided to do the right thing. All it now needs is to do what it has itself decided.
* China: Toward a Consumption-Driven Growth Path, Policy Brief in International Economics, October 2006,
www.iie.com. 中国上策：增加国内支出
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国应该采用什么样的汇率机制？答案一定是：一个能支持国内稳定增长的机制，而且鉴于中国在全球的作用日渐增强，这个机制也要能够支持国外的稳定增长。中国政府已经决定，将经济增长的推动力，转向更加依赖消费。中国这样做，说明它已在政治意愿层面确立了目标。如今，它必须在政治意愿层面确立达到目标的手段。
位于华盛顿的国际经济研究所(Institute for International Economics)的尼古拉斯?拉迪(Nicholas Lardy)，在新近一篇发人深思的论文中阐明了这种转变的依据*。过去25年来，这个研究所为了人们更好地理解国际经济政策问题，做出了众多贡献，这只是其中之一。我未必认同它发表的每一个观点。这并不奇怪。但如果没有它，这个世界就会孤陋寡闻、死气沉沉得多。所以，我还是要祝贺该研究所生日快乐！
拉迪的贡献是一个绝佳例证。他认为，中国经济的情况，未必都像统计数字所显示的那么健康。在2001年至2005年之间，投资对于总需求增长的贡献度超过50%。经常账户盈余占国内生产总值(GDP)的比例，2001年为1.3%，去年猛增至7.2%，而今年的预测比例为9.1%。其结果是，商品和服务的净出口，去年带动总需求增加了四分之一，今年还将增加五分之一。中国目前的经济扩张，显然是投资和出口主导型的。
这有什么不对吗？回答之一是，中国领导层自己认为这种情况成问题。2004年12月，中国领导层同意转向消费主导型增长。拉迪指出，它这么做的理由很充分。
首先，中国的投资占GDP的比重已飙升至40%以上，远高于其它快速增长的东亚经济体在可比发展阶段的水平。
其次，效率低下，症状就是产能过剩：在钢铁方面，中国仅闲置产能就超过了日本2005年的钢产量。
第三，这种资金密集型增长，已导致能源需求迅速增加及就业的缓慢增长。在1993年至2004年间，就业每年仅增长1%。
第四，新增投资可能给银行业带来新一轮不良贷款，破坏中国建立市场主导型金融体系的努力。
最后，净出口的增加有可能引发反弹，尤其是在美国。中国太大了，不能依赖出口主导型增长模式。
在所有这些理由之外，还应该加上最重要的一点：中国应该提高国民目前较低的消费水平。拉迪指出，2004年，中国的人均GDP是印度的2.5倍（以市场价格计），而家庭消费仅比印度高出三分之二。
中国决策者能提高消费在GDP中所占的比例（并由此降低储蓄占GDP的比例）吗？回答是：能。你可以就中国目前的政府存款与企业存款之间的平衡提出异议。但毫无疑问的是，两者之和占总储蓄额约三分之二。中国政府可以轻易地借入和支出更多资金，它还可以要求国有企业派发股息，迫使它们借贷，而自己花掉这些钱。
在中短期内，最佳的政策将是增加政府在卫生、教育、福利和养老金方面的开支，尤其是在该国最贫困的地区增加开支。不过，正如拉迪所示，在实践中，政府增加开支的举措始终过于保守。鉴于中国的储蓄过剩，现在需要的是增加远高于5% GDP的额外支出。
这就把我们带到汇率问题。首先，这种支出增加会不会提高实际汇率，即提高不可贸易服务相对于可贸易产品及服务的价格（上周专栏中讨论过这一点）。对多数经济体而言，答案将是肯定的。鉴于中国劳动力供应充足、投资率偏高，不出现这种结局也在意料之中。目前所需要的一切，可能不过是实现投资的重新分配，将投资引向那些资本密集度更低的服务活动。
因此，从扩大开支入手可能是明智的，而且无须担心汇率迅速变化，这种变化可能没有必要。然而在实践中，假设增加消费确实开始引发通胀压力，那该怎么办？在这种情况下，政府或者可以容忍更高的通胀率，并保持对货币升值的严格控制，或者可以允许货币加快升值，并确保通胀得到控制。通胀和升值，无非是让不可贸易品和可贸易品之间相对价格产生所需变化的两种方式，可以交替使用。
从本质上看，政府必须决定，固定汇率与稳定价格之间，究竟哪一个会是更好的预期参照指标(anchor for expectations)？从更长远的角度来看，稳定价格似乎是正确选择。随着中国经济规模的不断扩大和日趋成熟，它将需要“瞄准通胀目标的”央行以及浮动汇率体制。在短期内，中国可以保持相对固定的名义汇率，而接受更高价格。但由此导致的经济过热，可能会让中国付出很高的代价。
起点并非汇率，而是国内支出。此外，额外增加开支的首要目标，并非为了应对国外的政治压力，而是为了更高效率地利用本国资源。
不过，假设中国确实扩大了需求，并因此缩减经常账户盈余。这是否会改变全球的“失衡”模式呢？可能不会。这种变换也许仅会导致其它国家出现更多盈余，而不会缩小美国对华逆差。但是，通过增加国内开支，中国政府至少可以尽其所能，减轻其承受的外部压力。
这项政策将符合中国人民的自身利益。但它也符合一个更均衡的全球经济的利益。鉴于中国的外汇储备高达约1万亿美元，它不会承受什么风险。中国政府已作出正确的决定。如今它所需要的，只是执行自己的决定。
*中国：走向消费驱动型增长之路，国际经济政策简报，2006年10月，
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