Although most of the news lately has been centered on the negative economic effects of the European sovereign debt crisis and the US structural debt problem, the news from China has been much more encouraging. On November 16th, the Wall Street Journal reported that China is indeed growing its domestic economy as it claims. In addition, the Chinese current account surplus has dropped from 5.1% of its Gross Domestic Product (GDP) to about 3%. In a speech by President Barack Obama to the G20, a group of finance ministers and central bank governors from 20 major economies, the president urged the organization to pass a resolution stating that a country would need to appreciate its currency if its current account surplus was greater than 4% of its GDP. A current account surplus generally indicates that a country is exporting more than it imports, and appreciating its currency would make foreign imports less expensive, which would help balance out the surplus. In 2006 the Chinese current account surplus was about 9%, in 2007 it topped 10%, in 2008 it hovered just under 10%, and in 2009, as the Chinese government instituted its $500 billion domestic spending program and the world economy shrunk its surplus, it dropped to 6%. In 2010 it fell to about 5.1% and for 2011 it is projected to come in around 3%.
Adding to the good news from China is the fact that domestic consumption is growing. Currently each Chinese spends and produces about one tenth as much as his/her American counterpart. According to the CIA report, China’s GDP is expected to reach $6 trillion by the end of 2011 while the US GDP is just under $15 trillion. So currently the US GDP is about double the Chinese GDP. On a per capita basis the US GDP is about $50,000 ($15 trillion divided by 300 million) while the Chinese is $4,600 ($6 trillion divided by 1.3 billion people). So, if the Chinese were to grow domestic demand sufficiently so that Chinese per capita GDP equaled the US, the Chinese GDP would be $60 trillion and the Chinese domestic demand would solve the US unemployment issues (not to mention the European and world economic problems!). Obviously this growth will not happen overnight but the trend is very important and positive.
A China with growing domestic demand and a shrinking current account surplus can assist with US and world economic growth. This news, although barely discussed, may save the world. We need to remember that China has 1.3 billion consumers so the sooner Chinese demand grows, the better it is for the growth of world trade. Although the short term effect of the news is to blunt US criticism of Chinese yuan currency policy, the long term issue is much more robust and speaks well for the US economy as we finish 2011 and enter 2012!
