The respected economist and China expert Michael Pettis. The author argues that the world’s economy is being critically rebalanced, whilst the book deals with problems for the United States to combat its trade disadvantages, and the weakening of Euro power. According to the author, China lost a decade of economic growth as it went down on rapid investment growth by intentionally decreasing the cost of capital. Pettis blamed the current financial crisis on savings and consumption habits of some states. That can’t last a long time.
This book’s first chapter examines the ongoing global financial crisis and capital flow and trade imbalances over the last few decades. Second chapter discusses about the trade intervention methods adopted by countries in terms of devaluating their currencies and imposing import tariffs. Pettis argues that these activities inevitably contribute to commercial imbalances. Chapter three addresses the types of interference in the trade by any sort of tax changes that can interrupt the link between factors such as total output, consumption and investment. Pointing to trade surplus and success-driven model of Chinese economy, author argues in fourth chapter that this is actually due to unsuccessful domestic policies, which allowed savings rate to go above the investment rate. Fifth chapter discusses about the effect of such imbalance in one country due to the savings and investment gap, on other countries. Citing competition within European countries to be responsible for European financial crisis, Pettis has offered three resolutions to this problem, in the sixth chapter. In the next chapter, the author discusses about the “currency wars”, when different countries try to export their surplus savings to one-another. In next chapter, author argues that US dollar is a dominant reserve currency, which other countries like to acquire for seeking major share of global demand. The author argues in chapter nine that the global crisis can end only if the trade and capital imbalances, as explained in previous chapters, are reversed.
Opinions about the Book
Professor of Finance Michael Pettis at Beijing University began a battle between bears and bulls. Although bulls assume that China will have growth ahead of at least another decades, the Bears forecast that the economic growth will decline sharply in the coming years, because of these imbalances. This paper will attempt to explore Pettis’ claims in his book by analysing a study on China in real time. (8 questions)
What about China’s High Saving Rate
High savings rate in China may be due to conservative households. However, Pettis rightly argues that savings rate is dependant on few factors. If the GDP share, within the household income is higher, then the saving rates are lower. The inequality in income results in more savings. Financing with credit willingly by institutions, based on assumptions of future income generation affects the saving rate directly. Policy change that affects any of these factors will directly affect savings rate.
China-US Trade Relationship
Author correctly argues that balance of payments between the two countries must balance. For that to happen, it is important that savings and investments balance globally. However, China, having savings rate higher than its already huge investment rate has created the imbalances for world trade.
Causes of Financial Crisis
The author claims the consequence of the balance sheet defaults is the financial crisis. The settings for the commercial and capital accounts are interconnected. As the saving ratings change, due to domestic disturbing factors, its impact on trade account has a matching opposite impact on the capital account. Such imbalances create national balance sheet problems.
Is the Problem Resolved?
Many economists think that downsizing of China’s current account surplus from 10.1 percent in 2007 to 2.6 percent of GDP in 2012 has resulted in resolution of the crisis. However, agreeably, the author argues that this shrinkage in China’s current surplus has been due to the jump in investments, while the country needed reduced savings rate. The trade surplus declined due to lesser external demand, because of global crisis.
China’s High Saving Rates
According to Pettis, rising interest rates and wages along with stronger yen has resulted in the country’s high rate of savings. (Eight questions)
Michael Pettis ‘s book on trade and investment re-balancing is mandatory for all financial observers in China. In a nation leading to the global financial crisis, the author has correctly identified the implications of trade imbalances. The reversal of such imbalances is the need of the hour for resolving the current financial turmoil.
- “Eight Questions: Michael Pettis, The Great Rebalancing’.” CHINA REALTIME REPORT. Wall Street Journal, China, March 2013. Web. 30 Oct 2013 <http://blogs.wsj.com/chinarealtime/2013/03/07/eight-questions-michael-pettis-the-great-rebalancing/>
- Pettis, Michael. “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy”, nook for web Barnes & Noble-books, n.d. Web. 29 Oct 2013. <https://mynook.barnesandnoble.com/read.html?k=The-Great-Rebalancing/Michael-Pettis&ean=9781400846627#>