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6. Chinese Savings Gluts or Northern
Financialisation? The Ideological
Expediency of Crisis Narratives
Andrew Martin Fischer
Debates on the current financial crisis have been intense and ongoing,
particularly among economists intent on squirming out from under the
burden of responsibility with the convenient refrain that no one saw it
coming (besides those whose work was being ignored by the mainstream).
However, within this debate and despite its loosely substantiated evocations
of Keynes, a broadly neoclassical consensus has reasserted itself, showing
little or no variance from the mainstream views that brought us into crisis in
the first place. As if a refrain from past crises, the narrative is focused on
blaming the peripheries for crisis in the centre. The target is China, the most
obvious surplus country within global economic imbalances (besides
Germany, which somehow escapes similar castigation).
China‘s ‗savings-glut‘, it is argued, was a fundamental contributor to
crisis in Northern financial systems. The charge is that China‘s
interventionist economic strategies and its understandable but mistaken
obsession with amassing foreign exchange has been an important, if not
dominant, underlying cause of the credit bubble in the US. The logic is that a
foreign exchange savings glut emanated from Asia as an outcome of specific
policy choices, including currency undervaluation, taken in the aftermath of
the East Asian crisis of 1997–98. This savings glut was then recycled in the
US given that most foreign exchange reserves are held in US Treasury
securities or, increasingly, in non-government investments, which then
fuelled the notorious securitised subprime mortgages among other
speculative asset bubbles in the US economy. Hence, the Asian savings glut
crucially fuelled the US credit bubble. The Keynesian allusions are
presumably based on the idea that such savings will ultimately be self-
defeating whence bubble comes to bust and that surplus countries should be
penalised. China in particular must now make painful adjustments to correct
its previous policy blunders, primarily by allowing its currency to appreciate
The Financial Crisis and Developing Countries
86
and by liberalising its financial sector in order to end the repressed
consumption of its citizens.
This narrative might be called a ‗G20 consensus‘ given its endorsement
by leading central bankers and finance ministers in various international
economic fora since the beginning of the crisis.
1
It has been spearheaded by
leading economic commentators such as Paul Krugman or Martin Wolf,
central bankers such as Ben Bernanke and Mervyn King, economists working
for Goldman Sachs and other large private financial institutions, or else
economists at the Peterson Institute for International Economics in
Washington, such as Fred Bergsten, Nicolas Lardy, Morris Goldstein, and
Arvind Subramanian (indeed, some of these groups overlap). Many of these
economists have called for aggressive action against China on its exchange
rate, which they deem to be hugely undervalued and characterize as
‗mercantilist‘. It is with this logic that 130 members of the US Congress
called on the Obama administration in March 2010 to label China a ‗currency
manipulator‘, which would have then allowed for other punitive measures to
be taken against China. It is with the same logic that similar advocacy was
made in the US in September and October 2010. Strikingly, this consensus
has even captured the cognition of many on the political Left, reinforcing the
potential for this narrative to appear as a self-evident and infallible truism of
the current state of international economic affairs despite its very contestable
theoretical foundation.
This chapter offers a critical examination of the theoretical foundations of
this crisis narrative in two parts. The first reviews how the crisis was quickly
framed by leading public economists such as Martin Wolf or Paul Krugman
as a problem of excess savings, particularly those deriving from Chinese
surpluses, thereby deflecting attention away from the fact that the crisis is
more accurately rooted in the recent phase of rampant financialisation
intimately connected to the maintenance of US hegemony. The second
section then discusses how this logic is profoundly un-Keynesian and an
alternative explanation of the sequencing between US financial bubble and
Chinese surpluses is provided. The conclusion explores some of the
implications of this ideological reconstitution.
1. OF US CREDIT BUBBLES AND CHINESE SAVINGS
In order to clarify the logical steps of the savings-glut narrative in more
detail, it is useful to focus on the columns of Martin Wolf from the Financial
Times, given that he represents a powerful voice in its popularised
propagation. Notably, at the end of 2008, Wolf (2008b) iconically alluded
(without attribution) to the famous quote by Paul Samuelson that ‗we are all
Chinese Savings Gluts or Northern Financialisation?
87
Keynesians now,‘ referring to the apparent shattering of the consensus which,
it should be recalled, he had supported until it became obvious that the party
was ending in 2007. In this column, he also directed his attention to the issue
of rebalancing global demand. Beyond his case for a fiscal response to the
crisis, his focus on global imbalances appeared to be his other claim to
Keynesianism given Keynes‘ own efforts at the end of his life to create a
balanced post-war international trading and financial system that would
penalise surplus as well as deficit countries.
2
From his own side, Wolf
appeals to the idea of constructing ‗a new system of global financial
regulation and an approach to monetary policy that curbs credit booms and
asset bubbles…‘ Alluding also to Minsky, he argues that ‗…recognition of
the systemic frailty of a complex financial system would be a good start.‘ He
did not provide more guidance at this point, besides pre-empting criticism by
suggesting that we must meet this task ‗…in a spirit of humility and
pragmatism, shorn of ideological blinkers.‘
In his later columns, Wolf elaborated on the more important question of
how such bubbles came to be and thus how they can be undone by turning his
attention to China as a primary source of savings glut, thereby maintaining
the supply-side thrust of his condemnation of China‘s ‗mercantilist‘ currency
policies as laid out in Wolf (2008a). For instance, in Wolf (2009a), he set out
a standard argument about the transmission of a global savings glut to
financial debacle in the US. Citing a publically-unavailable paper from
Goldman Sachs, he reasoned that a global savings glut had driven two salient
features of the global economy leading up to the crisis: a huge increase in
global current account imbalances (especially the emergence of huge
surpluses in emerging economies) as well as a global decline in nominal and
real yields on all forms of debt. Conferring with the unidentified Goldman
Sachs authors, he dismissed the argument that loose monetary policy had
been driving these rising imbalances and falling yields because it ‗fails to
explain persistently low long-term real rates.‘ He listed the two remaining
salient features identified by the Goldman Sachs paper (an increase in global
returns on physical capital and an increase in the equity risk premium) and
then added one of his own; ‗the strong downward pressure on the dollar
prices of many manufactured goods‘. These, he argued, are additionally
explained by a massive increase in the effective global labour supply and the
extreme risk aversion of the emerging world‘s new creditors. In turn, this led
to the accumulation of net overseas assets, entirely accounted for by public
sector acquisitions and principally channelled into reserves.
Wolf (2009a) added that Asian emerging economies (China, above all)
have dominated such flows. He attributed this fact, along with his fifth salient
feature (downward pressure on dollar prices of manufactured goods), to
policy decisions, particularly China‘s exchange-rate regime. Thus, he
The Financial Crisis and Developing Countries
88
wrapped the plot together by centring in on China‘s decision to keep the
exchange rate undervalued. Concurring with the unidentified Goldman Sachs
authors, he argued that ‗…the low bond yields caused by newly emerging
savings gluts drove the crazy lending whose results we now see. With better
regulation, the mess would have been smaller… But someone had to borrow
this money.‘ He concluded that ‗China‘s decision to accumulate roughly
$2,000bn in foreign currency reserves was… a blunder‘ and it now has to
accept the consequences in the quest for global rebalancing, particularly if it
does not want to face default from its debtors (i.e. the US) no longer able to
consume Chinese surpluses through further borrowing. In order to do this,
China must, above all, correct its exchange regime.
Wolf (2009b) reaffirmed this argument later in September. He remarked
that it is no wonder the huge exposure of over 2 trillion dollars worth of
foreign currency reserves makes the Chinese government nervous. However,
nobody asked the Chinese to do this,‘ he asserted.
Having made what I believe was a huge mistake, the Chinese government
cannot expect anybody to save them from its consequences. A substantial
appreciation of the Chinese currency is inevitable and desirable in the years
ahead. The longer the Chinese authorities fight it, the bigger their losses (and
the pain of adjustment) are going to be.
This time he conferred with a paper by Goldstein and Lardy (2009),
published by the ‗nonpartisan‘ Washington-based Peterson Institute, that
currency appreciation would also help rebalance the Chinese economy in the
long term, among other policies such as further financial reform. He argued
that an appreciation of the real exchange rate, ‗ideally via a rise in the
nominal exchange rate,‘ is the primary means to end China‘s ‗massive
subsidy to its exports‘ through its ‗foreign currency interventions, combined
with the sterilisation of their natural monetary effects.‘ This in turn would
also serve to increase consumption as a share of GDP. On 17 November,
during Obama‘s visit to China, Wolf (2009c) again stepped up this tone of
urgency, insisting that the ‗US is entitled to protect itself against such
mercantilism … We have spent long enough discussing China‘s exchange
rate policies. It is time for action.‘ He has since been rutted into this tune.
It is not unsurprising, given Wolf‘s posturing since the beginning of the
crisis, that this is more or less the same position taken by the Obama
administration, and even the Bush Junior administration. Indeed, one of the
first acts of Tim Geithner as US Treasury Secretary was to declare China a
currency manipulator in January 2009, although he quickly stepped down
from this very aggressive stance. Notably, the Bush administration had been
toying with this threat for several years but had not yet taken a stand.
Similarly, on 19 October 2009, Ben Bernanke argued that Asia must guard
Chinese Savings Gluts or Northern Financialisation?
89
against a return to global imbalances in the economic rebound (see Guha
2009), even while Asia was being simultaneously thrashed by what has been
called ‗the mother of all carry trades‘ by Nouriel Roubini, stemming largely
from liquidity conditions in the US (see RGE 2009). Bernanke claimed that
the US-centred crisis had been fuelled by giant capital inflows that
overwhelmed both market discipline and regulatory safeguards against the
mispricing of risk. In other words, similar to Greenspan before him, his
interpretation of causality runs from surpluses to capital inflows and then to
liquidity and regulatory failure. His contention is that the East Asian push
into export-driven growth and trade surpluses following their experience with
the 1997 crisis subsequently produced imbalances between national savings,
consumption and investment. Hence, while leading the rebound, China
should work towards preventing a return to surpluses and asset bubbles. One
way to mitigate this risk would be ‗through some greater exchange rate
flexibility‘ offset by fiscal consolidation.
Some otherwise critical ‗liberal‘ aka ‗left‘ economists have reinforced
this savings-glut narrative of crisis. For instance, Paul Krugman, the flag
bearer for the ‗New Keynesians‘ in the US, also places emphasis on China‘s
exchange regime. In April 2009 he recounted that China chose, in the early
2000s, to keep the value of the yuan fixed to the dollar, resulting in the
necessity to buy dollars as trade surpluses mounted (Krugman 2009a). He
argued that such habits must change; ‗Two years ago, we lived in a world in
which China could save much more than it invested and dispose of the excess
savings. That world is gone… The bottom line is that China hasn‘t yet faced
up to the wrenching changes that will be needed to deal with this global
crisis.‘ He explained this further in a related blog (Krugman 2009b) by
clearly identifying the current crisis as a liquidity trap, in which we are faced
with an incipient excess supply of savings even at a zero interest rate. ‗In this
situation,‘ he explains, ‗America has too large a supply of desired savings
[his emphasis]. If the Chinese spend more and save less, that‘s a good thing
from our point of view. To put it another way, we‘re facing a global paradox
of thrift, and everyone wishes everyone else would save less.‘ The New
Keynesian credentials of this argument seem to be based on an idea of the
paradox of thrift, albeit excess savings in his version do not adjust to
aggregate demand but instead keep sloshing around the system.
While he was more parsimonious with his blame in these springtime
blogs, Krugman (2009c) nonetheless came out much stronger against China
in his autumn op-eds, in line with the positions mentioned above. He claimed
that ‗China‘s bad behavior is posing a growing threat to the rest of the world
economy. The only question now is what the world — and, in particular, the
United States — will do about it.‘ It is interesting that in his discussion, he
omitted any recognition of the revaluation of the yuan from 2005 onwards
The Financial Crisis and Developing Countries
90
(see Section 2 below) but concluded that many ‗economists, myself included,
believe that China‘s asset-buying spree helped inflate the housing bubble,
setting the stage for the global financial crisis. But China‘s insistence on
keeping the yuan/dollar rate fixed, even when the dollar declines, may be
doing even more harm now.‘ Krugman encouraged a more bullish approach
from US officials to negotiations with China on currency manipulation.
Helping to set the tone later asserted by Wolf, he insisted that ‗with the world
economy still in a precarious state, beggar-thy-neighbor policies by major
players can‘t be tolerated. Something must be done about China‘s currency.‘
By March 2010, Krugman (2010a) was adamant that it is ‗time to take a
stand‘ by calling China a currency manipulator.
A similar narrative has found a hold even further to the left. A strong
example is Robert Wade (2009). This is somewhat paradoxical given that he
usually opposes Martin Wolf on most issues, but here he seems to find an
affinity in the savings supply-side interpretation of the crisis by placing
emphasis on how ‗global imbalances have had an important causal role… at
the domestic level, in the form of credit recycling to the agents spending
more than their income‘ (Wade 2009, pp. 542 – 3). He implies that, as the US
fiscal deficit fell as a share of GDP after 2003, private sector and current
account deficits had to balloon due to the global imbalances. This was
facilitated through ‗credit recycling to the private sector,‘ which ‗…took the
form of capital inflows going mainly into mortgage finance (for example, the
central bank of China bought the securities issued by the government-backed
mortgage lender Freddie Mac), creating a real estate boom‘. He offers this
perspective as a way to explain why ‗the ―mistakes‖ in monetary policy and
financial regulation were made‘ (he implies they were the consequence of
global imbalances) and why the crisis resulted in a run into the dollar rather
than away from it. Hence he concludes that the issue is too important to
ignore; ‗the current policy responses nationally and internationally are
focused too narrowly on the financial system and not enough on the
imbalances and what lies behind them…‘. Through this logic, Wade actually
finds himself quite close to the position of Wolf, arguing that much more is
needed than simply correcting mistakes in monetary policy and financial
regulation, although he does not explicitly spell out what this should entail
for China (e.g. see Wade 2009, pp. 550 – 51). While he repeatedly quotes
Keynes and evokes Keynesian remedies, it is interesting that his streamlined
albeit somewhat ambiguous interpretation of the crisis, condensed into a
mere page of text, seems to rest on a causality running from global
imbalances to credit crisis, rather than, for instance, imbalances being a
reflection of the US credit conditions that lead to crisis. If so, his argument is
essentially in line with that of Wolf, Bernanke and Krugman.
Chinese Savings Gluts or Northern Financialisation?
91
It is precisely this de facto consensus across much of the Left and Right
that provides the potential for a powerful ideological reconstitution. Perhaps
the guise of the reconstitution would not exactly match the neoliberalism that
the Left so despises, but it would effectively legitimise a strategy of shifting
the burden of adjustment onto the most obvious peripheral surplus country
that, in the end, is not even a serious industrial contender but instead is
deeply integrated into regional and international production networks
increasingly dominated by Northern corporations. In other words, despite the
attention to global imbalances, these narratives ignore the underlying
structures of production, distribution and ownership – or of power – that
drive these imbalances. Indeed, from this latter perspective, the current crisis
could well represent an important milestone in the seismic reorganisation and
consolidation of these international production networks. If so, it is quite
possible that repressed US wages and Chinese trade surpluses are both
symptoms of larger global forces at work, encompassing financialisation in
the centre and network reorganisations in East Asia since the 1997–98 crisis.
2. KEYNES IN BEIJING
In order to understand the last point, it is important to question whether these
emerging narratives have understood the causality the right way around. Is it
the case that emerging market surpluses have been generating a savings glut
that is then transmitted and amplified through the financial sector to the US?
According to this logic, the US financial sector might not be efficient in the
sense of avoiding bubbles, but it definitely does its job with a vengeance,
even if somewhat hectically. However, it could not do this job if the global
imbalances had not provided a source of liquidity to slosh.
Despite the ritualised claims on the intellectual soul of Keynes that have
become a litany accompanying these narratives, the underlying logic is
profoundly un-Keynesian. To borrow the words of Geoff Tily, from a
Keynesian perspective the logic amounts to the tail wagging the dog.
3
In
other words, it is based on the principle that supply creates its own demand
(i.e. Say‘s Law). To frame this in the current discussion, Asian savings drive
US aggregate demand. Or, in the words of Wolf (2009a), ‗… someone had to
borrow this money …‘ Or, as argued by Wade, if ‗the external deficit
remains constant (or rises) and the fiscal deficit falls, there must be an
offsetting increase in private indebtedness‘ (Wade 2009, p. 542). This logic
helps to clarify why both Wade and Wolf argue that the crisis cannot be fully
explained by ‗folly, greed and mis-regulation‘ (Wolf 2008b) or by
‗―mistakes‖ in monetary policy and financial regulation‘ (Wade 2009).
The Financial Crisis and Developing Countries
92
Keynes would have rejected this logic. Indeed, it was precisely this logic
that was at the heart of his rejection of what he called ‗the classics‘. Instead,
he argued that aggregate savings adjust to aggregate demand, not the other
way around. To translate this into the current context, US aggregate demand
drives US external imbalances, which in turn drive the imbalances of those
economies oriented towards servicing US demand and/or absorbing excess
US liquidity, primarily through investment and/or speculative demand in
those economies, to which aggregate savings adjust. Changes in US
aggregate demand are influenced by deficit spending, which in turn is
influenced by warmongering and ideological obsessions with cutting taxes
and subsidising the wealthy, and by private demand augmented by phases of
financial deregulation, innovation and resultant credit bubbles. In other
words, another phase of rampant financialisation in the centre drives global
imbalances. Placing this in the context of China, China‘s invest ment rates are
not high because the Chinese save a lot. Rather, China‘s aggregate monetary
savings (which includes credit from the banking system as well as finance
from abroad, as discussed below) are high because of high rates of
investment, which are in part responding to aggregate demand from the US
and Europe, among other factors. China‘s growing surpluses and building
foreign exchange reserves are outcomes of these processes rather than causes.
There is a strong case to be made that this Keynesian interpretation fits
the historical stylised facts quite well, at least much better than the supply-
side (neoclassical) interpretation. To start with, it is important to recognise
that the Chinese authorities have been keenly aware of the dilemma of the
low consumption to GDP share for much longer than is typically
acknowledged by western commentators. Raising this share has been an
explicit government goal since at least 2003. Already in 1998 one of the first
reactions of the government to the East Asia crisis was to boost domestic
demand. It has since been a subject of much domestic debate. The failure to
achieve this goal of lowering the investment share can, by lack of any
obvious or desirable alternative, hardly be called a ‗choice‘. It is certainly not
the case that, as suggested by Krugman (2009a), ‗China acquired its $2
trillion stash – turning the People‘s Republic into the T-bills Republic – the
same way Britain acquired its empire: in a fit of absence of mind.‘ However,
Krugman is probably right that there was not necessarily a deep strategy
behind this vast accumulation of low-yielding assets. Indeed, in recognising
its inability to balance its external position, the central government quickly
and very consciously opted for the contingency option of at least managing
the imbalances through sterilisation. The choice to ride the wave of regional
and global economic restructuring is understandable. Balanced or not, growth
was a priority given the enormous challenges facing China, still a poor
country, including fairly high levels of urban unemployment, persistent rural
Chinese Savings Gluts or Northern Financialisation?
93
poverty, and, in this context, the planned urbanisation of the about one-third
of the country‘s population over the course of the next generation. (For
further discussion, see de Haan and Gong, Chapter 13 in this volume.)
Moreover, the common assertion that China‘s high savings rate derives
from high household savings, which in turn drive investment versus
consumption, is another caricature worthy of some attention. Notably, many
of the arguments in this respect involve a blurring between a conception of
savings as household savings (i.e. choices between consumption and saving
out of total household income) and the residual concept of ‗national savings‘
in national accounting (i.e. the difference between aggregate output and
aggregate consumption). The latter conception assumes that aggregate
savings equal aggregate investment (plus the external balance) whether by a
neoclassical logic whereby savings drive investment, or else by a Keynesian
logic whereby savings adjust to aggregate demand, which is driven by
consumption and investment decisions. Notably, there is nothing implicit or
explicit in national accounting that predisposes it to the neoclassical logic.
The distinction is important because there is, in fact, much contention
around the caricature of Chinese household thrift. For instance, He and Cao
(2007, pp. 3–6 ) point out that the high levels of national savings in China are
not explained by the household sector but by the government and corporate
sectors. In reality, they note that aggregate household savings accounted for a
shrinking fraction of total national savings, falling from 52 per cent of
national savings in 1992 to 42 per cent in 2001.
4
They further explain that the
high national savings rate is in part attributable to fast growth of savings in
the non-financial corporate and government sectors. Moreover, their detailed
analysis reveals an implicit Keynesian slant in that, despite the high and
increasing levels of savings in both the government and non-financial
corporate sectors, such savings were insufficient to meet investment demand.
The government was covering its shortfall by issuing large amounts of
government bonds.
5
Similarly, non-financial corporate savings (i.e. retained
earnings) covered only about half of that sector‘s investment needs up to
2001 (the most recent data covered by the authors). Bank lending was the
major source of financing to cover the gap, although other sources included
portfolio finance and an increasing share of financing from abroad, the latter
reaching 39 per cent of bank loans already by 2001, up from 22 per cent in
1992 (ibid, pp. 10 – 11). Thus, the appearance of rising national savings rates
in large part reflects monetary expansion, credit creation, increasing levels of
foreign financing, and increasing levels of reinvested corporate earnings, all
in response to investment demand.
This would also help to explain the falling share of household disposable
income in national income despite very high rates of growth in such
household incomes that are the envy of most developing countries. It is in
The Financial Crisis and Developing Countries
94
this sense that the high residual category of national savings should not be
conflated with a notion of repressed consumption or savings-led investment
but, rather, as an attribute of the speed by which China has been catching-up.
6
While He and Cao recommend a variety of government-directed
redistributive policies and further reform in the domestic financial sector to
deal with the resultant imbalances, currency appreciation and international
financial liberalisation are absent from their recommendations.
The issue of currency revaluation reveals another fallacy of the savings-
supply-side analysis of the Chinese growth experience. Namely, it is not at
all clear whether revaluation would have any impact on China‘s external
surpluses, nor is it clear whether the Chinese yuan is even undervalued in the
first place.
7
Notably, the government allowed the yuan to appreciate against
the US dollar by over 20 per cent from July 2005 to July 2008. At the same
time, China‘s trade surplus in goods exploded from around 3 per cent of its
GDP in 2004 to a peak of over 9 per cent in 2007.
8
More specifically, the
value of the trade surplus with the US more than doubled between 2004 and
2007, increasing from about 4 per cent to 5 per cent of nominal Chinese GDP
converted into US dollars at market exchange rates, i.e. even after accounting
for the effect of revaluation on this nominal calculation. This simple
observation suggests that the external imbalances have borne little relation to
the exact relative valuation of the Chinese currency but, rather, to underlying
structural changes in the organisation of international trade and production.
Revaluation advocates have retorted that the yuan was so undervalued
that much more revaluation is needed. More sophisticated versions of this
argument contend that other intervening factors, such as interest rate
differentials, have prevented revaluation from inducing the necessary
adjustments (for instance, see Pettis 2010). However, alternative explanations
include China‘s integration into networks controlled by transnational
corporations (TNCs), with the result that revaluation is unlikely to have much
effect on the competitiveness of Chinese exports because so much of the
inputs for these exports are imported (and priced as intra-firm transfers),
cancelling out the potential effect of any currency movement.
9
Indeed, much
of the trade account could actually represent capital flows given the
predominance of transfer pricing practices used for intra-firm transfers within
the TNC networks that dominate China‘s trade.
10
The disjuncture between
currency appreciation and rising trade surpluses is also partly explained by
rising productivity in China, which compensates for currency appreciation by
lowering unit-labour costs. Hence, the real significance of the trade data must
be evaluated with much caution.
Even if we reject the notion that excess savings have been driving these
surpluses, an argument could still be made, as does Pettis (2009), that the
excess output has been caused by artificially-high levels of investment
Chinese Savings Gluts or Northern Financialisation?
95
0
200
400
600
800
1000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
US current account (-)
China current account
China reserves (-)
encouraged and subsidised by government industrial policies intent on
‗turbo-charging economic growth.‘ Hence, from this logic, it could be argued
that excess output has been driving external imbalances. However, this
obviously begs the question of what allows for the consumption of such
output surpluses. In other words, what are the international factors that enable
the government to follow such investment strategies in the first place? After
all, at the end of the 1990s and in the wake of the East Asia crisis, the
Chinese economy was facing serious problems with overproduction in many
sectors, as well as generalised price deflation in the economy, particularly for
agricultural and manufactured goods. From the vantage point of the time, it
was not obvious whether the government would be able to continue an
investment-driven strategy. As reasoned by Hu Angang (2000); ‗We will see
what is going to happen after the WTO rules take effect but for the time
being it is difficult to know what will happen in those sectors.‘
Source: China: CSY (2009: Table 2-34) and IMF IFS data base. US: IMF IFS
databases. (Accessed on 27 October 2009.)
Figure 6.1 US current account deficit (reversed) and China current account
surplus (1995–2008, billions of US dollars)
Many economic commentators in the US have suggested that the US
consumption of this surplus was more or less induced by the imbalance,
given the responsiveness and absorptive capacity of its mature free market
economy. Hence, the reasoning that overproduction caused trade and foreign
exchange surpluses, which in turn caused the credit bubble. The alternative
hypothesis is that financially-lubricated corporate restructuring and
The Financial Crisis and Developing Countries
96
expansion in the US and other Northern economies drove Asian surpluses. In
order to analyse this question, it is useful to examine the sequencing of
China‘s current account surpluses and US current account deficits, presented
in Figure 6.1. The US deficits and China‘s reserves are presented with
reversed signs in order to more effectively evaluate the evolution of this
bilateral comparison. The values are in current US dollars as this best
represents the respective monetary weights of the imbalances in the
international economy, particularly in comparison to each other.
Through this simple comparison, it is quite clear that the argument that
China‘s surpluses have been fuelling the credit bubble in the US equates to
placing the cart in front of the donkey. China‘s current account surplus
shrank from a brief East Asia crisis high of $ 40 billion in 1997 to $ 17.4
billion in 2001 (1.3 per cent of its GDP), while the US current account deficit
simultaneously fell from $ –141 billion to $ –398 billion. The bursting of the
dotcom bubble in 2000 and the ensuing recession in the US caused a slight
correction to this trend in 2001, but thereafter the US current account deficit
continued its precipitous decline, whereas the Chinese current account only
started to increase at a comparable pace after 2004 (in terms of year-on-year
increase in nominal value, not in terms of pace of change). Up to 2004,
China‘s surplus had increased only gradually to $ 69 billion by 2004,
whereas the US current account deficit had fallen to $ –631 billion. In
comparison to 1997, China‘s surplus had not even doubled by 2004, whereas
the US deficit had increased 4.5 times. The nominal increment in surplus for
China was only $ 28.7 billion between these years, whereas the US deficit
had increased by $ 490.4 billion. In this light, the argument that the reduction
in the US fiscal deficit as a proportion of GDP in 2003 caused an expansion
in the private sector deficit due to the necessity to absorb global imbalances
(primarily those from China) appears particularly specious, at least in the
case of China. It is only from 2005 onwards that the current account surplus
of China started to explode at a pace comparable to the US freefall into
deficit that had been well in course since the East Asian crisis.
Notably, an equally dramatic descent into deficit with the rest of Asia
(mostly East and Southeast Asia) – parallel to the rising surpluses with the
US and Europe – underlay China‘s emerging global trade surplus in the early
2000s. China‘s trade balance with Asia shifted from a surplus in the 1990s, to
a slight deficit in 2001, to a sudden increase in the trade deficit to about $ 74
billion by 2004, almost equal to the surplus with the US of $ 81 billion in the
same year. This was the result of is phenomenally increasing import and
export volumes with Asia. For instance, China‘s imports from Asia increased
from $ 147 billion in 2001 to $ 620 billion by 2007 (over half of total
imports). This exceeded the combination of its export trade volumes with the
US and Europe.
11
The descent into deficit with Asia stalled from 2005
Chinese Savings Gluts or Northern Financialisation?
97
onwards because China‘s exports to Asia started to catch-up with its imports
from Asia, which again is counterintuitive given the revaluation of the yuan
from 2005 onwards. The stalling of the deficit with Asia explains the sharp
rise in the overall trade balance from that year onwards given that the
surpluses with the US and Europe continued to rise. From this perspective, it
is also clear that the recent trade surpluses have been generated through
phenomenal (and phenomenally increasing) volumes of turn-over,
particularly in the processing trade between East Asia, the US and Europe.
Returning to the overall picture presented in Table 6.1, the trend of rising
imbalances appeared sooner in China in terms of reserves, which started to
increase in 2001, although still slower than the increasing US current account
deficits. Notably, this was because of a huge surge of capital inflows into
China in 2001–05. These would have been related, in large part, to the
centrifugal capital outflows from the US during the recession in 2001
combined with increased net inflows of FDI parallel to China joining the
WTO in the same year. Then, much of the inflows were related to speculation
on yuan revaluation up to 2005 together with further FDI. Thus these capital
flows were a reflection of financialisation in the US rather than a cause of it.
It can hardly be said that reserves accumulated by China through its
sterilisation of capital inflows contributed to the US credit bubble as much of
these inflows derived from US credit expansion in the first place (and from
credit expansion in supporting financial centres). The fact that the surge on
the capital account preceded the surge on the current account by about three
to four years suggests that the latter was due to international restructurings of
production and distribution that were being led by the former.
While more detailed analysis of causality is required,
12
there is a strong
case to be made that the Chinese current account surpluses were responding
to imbalances in the US. Indeed, the US credit bubble had already been well
in progress by 2005, when the Chinese current account surplus started to
explode. The US current account deficit then hit its – nominal – trough in
2006, at the peak of the credit bubble in the US. As mentioned above, the
Chinese trade surplus in goods hit its peak as a proportion of GDP in 2007, at
the outset of the US credit crisis, after which it has since fallen. While the
Chinese current account surplus has continued to increase in nominal value,
in 2008 it still remained about $ 280 billion less than the US current account
deficit in the same year. Moreover, the Chinese surplus only started to
increase faster than the US deficit fell from 2006, although by this point the
credit bubble in the US had already reached its zenith and was starting to
wane, mutating into volatile international activities such as carry trades and
other speculative pursuits by hedge funds and related financial institutional
innovations (UNCTAD 2007, pp. 15–22). With the onset of crisis, Chinese
surpluses have arguably played a counter-cyclical role in the US economy.
The Financial Crisis and Developing Countries
98
The key question in this analysis of sequencing regards the causes of the
sudden emergence of China as mercantilist tour de force since 2001. Notably,
up to the late 1990s, China‘s current and capital accounts were much more
typical of a ‗late late‘ peripheral industrialiser, in the sense that growth spurts
usually ended in current account deficits, subsequently requiring austerity to
correct. China‘s escape from this classic predicament of peripheral late
industrialisers appears intimately related to the systemic rerouting of East
Asian centred international production networks (IPNs) through China that
followed the East Asian crisis in 1997-98. As discussed above, this can be
inferred through a regionally disaggregated examination of its trade balances,
which reveals that the pattern by which China has built very large trade
surpluses with the US and Europe parallel to large trade deficits with East
and Southeast Asia only emerging since the East Asia crisis.
13
A growing body of literature on transnational corporations (TNCs) in
Asia confirms this observation, providing strong evidence of China‘s
subordinate third or even fourth-tier position within these IPNs.
14
For
instance, Athukorala and Yamashita (2009, pp. 54–5) argue that the growing
trade deficit between China and the US has been related to the reorganisation
of these IPNs – through the lead of US firms – consolidating the use of China
as the main point of final assembly of high-end parts and components
sourced from other higher-tier bases in East and Southeast Asia. Yao (2009)
similarly argues – in a strong critique of Rodrik (2006) – that it is deceptive
to conclude that China has been technologically upgrading its exports to the
extent suggested by trade data. Rather, China‘s move into higher technology
exports has been ‗closely associated with its processing trade regime and
foreign outsourcing to China‘ (Yao 2009, p. 63). These arguments confer
with the previous observation from He and Cao (2007) that finance from
abroad has been quickly rising in prominence in the late 1990s and 2000s as
a source of funding for non-financial corporations, increasingly
complementing government funding and bank loans.
Arguments for yuan revaluation as part of the solution for global
imbalances avoid this emerging role of China as mass processor in the final
assembly of goods destined for US and European consumption through
networks heavily and increasingly dominated by Northern TNC production
and distribution networks. They also avoid the parallel processes of
financialisation in the US and Europe that fuelled not only consumption in
these final trade destinations but also Northern consolidation of control over
these production networks in the 2000s. This essential missing link leads to a
completely different analysis regarding the significance of China‘s
imbalances and, more importantly, the ownership and control of the wealth
that they represent. For instance, Zheng and Yi (2007, p. 19) note that
China‘s ‗foreign exchange reserves do not imply wealth that is disposable at
Chinese Savings Gluts or Northern Financialisation?
99
any time, but rather a sizeable indirect debt,‘ in the sense that a large
proportion of China‘s foreign exchange holdings represent the investments
and non-repatriated profits of foreigners. Similarly, Kregel (2008, p. 28)
points out more generally that a deterioration of the recorded US trade
balance might actually reflect the increased profitability observed in the past
ten years of US companies operating in the global market. Athukorala and
Yamashita (2009, p. 40) also conclude that observations drawn from out-of-
date reporting systems designed at a time when countries were trading only
in final goods are misleading. It is vital to see the current debates in this light.
3. CONCLUSION
This chapter focused on the ideological expediency of recent crisis narratives
with regard to the role of China in the global financial crisis of 2007-09,
which explain China‘s excess savings as a key driver of financial crisis in the
US. An alternative interpretation of global imbalances was proposed from a
Keynesian perspective, emphasising that aggregate monetary savings adjust
to aggregate demand, not vice versa. Hence, financialisation in the US can be
seen to drive global imbalances. China‘s external surpluses and reserves are
outcomes of these processes rather than causes, particularly through the
mediation of the systemic rerouting of East Asian centred international
production networks through China that followed the East Asian crisis in
1997-98. Arguments for revaluation of the Chinese yuan mostly avoid the
implications of this emerging role of China as subordinate mass processor in
the final assembly of goods destined for US and European consumption
through networks heavily and increasingly dominated by Northern TNC
production and distribution networks. The presumption that China has been
in a position of strength during the recent crisis is one that treats China as if it
were one of the central powers behind the expansion and regulation of the
global monetary and trading system. A false evaluation of such strength
could have dramatic implications for China, particularly if the proposed
strategies of currency and financial liberalisation would result in accentuating
vulnerability to volatile capital flows in the near-future reverberations of the
recent crisis. This concern is all the more important given the huge surges of
international liquidity – largely generated by Northern financial systems –
that led to the build of crisis and that have also followed from the outcome of
the crisis response, and which could quickly erode China‘s own foreign
exchange reserves in the medium term.
The danger with the dominant narrative – which cuts across both political
Left and Right – is that it facilitates an ideological reframing that legitimises
strategies from the centre that are ultimately bent on discipline and
The Financial Crisis and Developing Countries
100
subordination. Whether devised or emanating from impulsive protective
responses to crisis, these strategies are oriented towards shifting the burden
of adjustment away from Northern financial sectors and towards the most
obvious Southern scapegoats within the international economic order. The
advocated strategies are unlikely to solve the issues that they purport to
address, but in the havoc potentially created they could enact a
reconsolidation of US economic hegemony, albeit with dubious implications
for publics in both China and the US. For, if we see US-China trade in terms
of bilateral arms-length transactions of finished goods as per conventional
conceptions of trade in economic theory, it is true that China cannot continue
to rely on over-indebted US consumers to continue to consume its surpluses.
But if we see the organisation of this trade not in terms of countries but in
terms of corporations and their networks controlling wealth, then yes, the
imbalances can and probably will continue because they are not expressions
of market outcomes but of structures of power. The global imbalances
narratives must therefore be seen as the emerging ideological discourses of
such power, whether or not their proponents are aware of this implication.
NOTES
1
I am indebted to Geoff Tily for suggesting this term ‘G20 consensus’
2
Wolf is not explicit about this claim to a Keynesian legacy.
3
Geoff Tily made this point during the question period that followed a talk by
Prabhat Pranaik at LSE in July 2009. See Tily (2009, p. 12).
4
This share has presumably fallen further since 2001 given rising shares of
government consumption in total consumption and gross capital formation in
total GDP up to 2008 (see CSY 2009: Table 2-17 and 2-18).
5
Also see the discussion of bond issuance in Sun (2009).
6
See some historical international comparisons in He and Cao (2007:9).
7
For a review and discussion of the currency debate, see Fischer (2010a).
8
The balances are calculated from balance of payments data from various
China Statistical Yearbooks. See Fischer (2010b) for further details.
9
This point was made in 2005 by Lau and Stiglitz (2005).
10
This point is mentioned by Li et al (2007).
11
Data are compiled and calculated from CSY (2009: Table 17-8) and
equivalent tables in earlier statistical yearbooks. See Fischer (2010b).
12
See some preliminary work in Fischer (2010b).
13
See Fischer (2010b) for analysis of these data, as well as Athukorala and
Yamashita (2009). Also see Fischer (2009).
14
For example, see the excellent contributions by Athukorala (2007), Li et al
(2007), Athukorala and Yamashita (2009) and Yao (2009).
