China and America: A Time of Reckoning by Charles Dumas
Profile Books, US$22.95
Charles Dumas doesn’t come across as a happy man in China and America: A Time of Reckoning. In his earlier work, The Bill From the China Shop, published in 2005, Dumas forecasted a global slowdown as excessive US household debt put the brakes on economic growth. “So it has proved,” Dumas writes glumly in the introduction to his new book.
The reasons for that glumness are easy enough to understand. In The Bill from the China Shop, Dumas argued that the root of the world’s economic problems lay in an Asian current-account surplus problem – a “Eurasian savings glut.” Since that book was published the glut has increased, as has China’s role in it.
In the two years to 2007, the glut grew by more than half, but China’s current surplus more than doubled from $160 billion to over $350 billion. Far from dissipating, the dark clouds that Dumas foresaw in 2005 are growing stormier.
A ballooning trade surplus puts China’s economy in danger of serious economic overheating, Dumas writes. Arguing that China needs to change its strategy, he calls a radical appreciation of the yuan the obvious and necessary solution. But institutional resistance to change, born out of a highly successful mercantilist development policy, leads him to fear that little will change until economic pain prompts greater risk taking.
The book is well-written and convincingly argued, but Dumas’s obsession with an appreciating yuan is nonetheless confusing. He touches on the need for Beijing to release its grip on overseas investment, but this seems to be an aside from his main argument: that China’s defence of the cheap yuan is creating distortions that will ultimately spell disaster for the world’s economy.
While it is true that a rising yuan would encourage more balanced trade, it’s far from clear that sudden, radical appreciation would be necessary to achieve this, or that it would be the panacea that Dumas suggests.
If his prescription is questionable, his diagnosis of an unsustainable system’s dire need for change rings true. We can hope that sharp analyses like China and America will encourage policymakers to reconsider their approach, lest Dumas’s gloomy predictions come to pass yet again.