China Unbalanced
For exclusive use at Great Lakes Institute of Management (GLIM), 2015
9 -7 1 1 -0 1 0
REV: MARCH 30, 2012
DIEGO COMIN
RICHARD H. K. VIETOR
China “Unbalanced”
We urgently need to transform the pattern of economic development,” pronounced Premier Wen Jiabao in
March 2010. “We will work hard to put economic development on the track of endogenous growth, driven by innovation. — Premier Wen Jiabao, March 20101
Since the early 2000s, the success of China’s export-led growth strategy had been alienating major trade partners—especially Europe and the United States. By 2005, China’s trade surplus had reached
$134 billion, of which $114 billion was with the United States alone. Foreign-invested firms accounted for more than half of this amount. 2 In the U.S., organized labor and various pundits and politicians increasingly blamed China for the loss of as many as 3.5 million manufacturing jobs.3 U.S. Senator
Chuck Schumer (D-NY) became a leading voice calling for punitive tariffs if China did not allow its currency, the yuan, to appreciate.4 When China did allow the yuan to appreciate beginning in May
2005, the yuan grew by almost 21% over the next three years, from 8.3 to 6.8 yuan per dollar.
However, in October 2008, China once again froze the exchange rate. By then, China's trade surplus with the United States had grown to $258 billion, while its overall current account surplus reached
$426 billion.
Although political complaints about China’s export-led growth model achieved limited traction, the global financial crisis brought the problem to light. In the fourth quarter of 2008, China’s exports shrank for the first time since 1978. In the first quarter of 2009 they dropped by 25%. Chinese savings stood at 51%, with consumption at 36%. As thousands of processing and assembly plants were forced to close, laying off as many as 20 million workers, it now became absolutely clear to China’s leadership that the growth model was flawed—excessive savings and export-investment,
9 -7 1 1 -0 1 0
REV: MARCH 30, 2012
DIEGO COMIN
RICHARD H. K. VIETOR
China “Unbalanced”
We urgently need to transform the pattern of economic development,” pronounced Premier Wen Jiabao in
March 2010. “We will work hard to put economic development on the track of endogenous growth, driven by innovation. — Premier Wen Jiabao, March 20101
Since the early 2000s, the success of China’s export-led growth strategy had been alienating major trade partners—especially Europe and the United States. By 2005, China’s trade surplus had reached
$134 billion, of which $114 billion was with the United States alone. Foreign-invested firms accounted for more than half of this amount. 2 In the U.S., organized labor and various pundits and politicians increasingly blamed China for the loss of as many as 3.5 million manufacturing jobs.3 U.S. Senator
Chuck Schumer (D-NY) became a leading voice calling for punitive tariffs if China did not allow its currency, the yuan, to appreciate.4 When China did allow the yuan to appreciate beginning in May
2005, the yuan grew by almost 21% over the next three years, from 8.3 to 6.8 yuan per dollar.
However, in October 2008, China once again froze the exchange rate. By then, China's trade surplus with the United States had grown to $258 billion, while its overall current account surplus reached
$426 billion.
Although political complaints about China’s export-led growth model achieved limited traction, the global financial crisis brought the problem to light. In the fourth quarter of 2008, China’s exports shrank for the first time since 1978. In the first quarter of 2009 they dropped by 25%. Chinese savings stood at 51%, with consumption at 36%. As thousands of processing and assembly plants were forced to close, laying off as many as 20 million workers, it now became absolutely clear to China’s leadership that the growth model was flawed—excessive savings and export-investment,