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Righting the Ship of Trade: China, the 12th Five Year Plan, and the Pace of Change

Yuwa Hedrick-Wong |

While the eyes of the world are fixed on regulatory, government and banking responses to turmoil  in the Eurozone, seismic events across the world in China could do more to shape the global economy long term.

Rarely is a comment made on the global economy without referencing the global imbalance, in terms of trade and relative currency values, and China’s part in perpetuating it. And, indeed, China in the past decade has been reshaping the pattern of global trade, not just as an “export machine”, but as a trading partner in terms of import/export of goods and services, investment and capital flows. However, neither China’s success in imports, nor its rise as a trading partner can be explained in terms of its trade imbalance or undervalued currency.

I hold the view that China’s role in the global imbalance is due primarily to its internal economic imbalance, mostly as a result of a series of developments in the past decade. From this perspective, China’s under-valued currency has at best played a tangential role. Moreover, the media hype on China as an export machine has the unintended consequence of focusing attention on the export side of the current account. An economic structure that coupled monopoly profits with low labor costs, in addition to the One Child Policy, kept household savings high and consumption relatively low.

But China is now at the cusp of a profound structural shift in its economy, and in the coming years, coinciding with the 12th Five Year Plan, due to take effect later this year, domestic private consumption will likely rise much faster than before.

Since domestic private consumption is, I believe, the only true measure of value in any economic system, this rise in consumer spending will go far in easing the domestic imbalance, which does much to cause the global imbalance, the latter such a popular topic of discussion among pundits, economists and the governing classes.

Also appears on MasterCard’s The Heart of Commerce Blog.

Topics: Economic Outlook

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