By Olivia Chung
HONG KONG – Changes to China's Qualified Domestic Institutional Investor (QDII) scheme announced at the end of the year appear to tug in opposite directions a project initially set up to allow Chinese people to invest in overseas securities through authorized financial institutions.
One change to the scheme, which offers an overseas outlet for domestic savings while the country's currency, the yuan, remains not fully convertible, makes Britain the second overseas market after Hong Kong in which Chinese banks can invest QDII funds.
The US markets are expected to be next in line for opening to QDII funds. Li Fuan, head of the China Banking Regulatory Commission’s innovation supervision coordination department, last month said agreement was reached during the two-day third Strategic Economic Dialogue with the US in December to allow Chinese banks to invest clients’ money in US markets.
According to the Shenzhen Daily, Li didn't give a specific timetable for implementation of the QDII expansion, saying only that it would happen "very quickly".
The expansion will help financial institutions to diversify risks and was broadly welcomed by the domestic media and economists. A second notable change in QDII rules had a more mixed reception, with some economists and analysts describing it as "ridiculous" and "unreasonable".
On December 12, China's fund management firms, securities brokerages and banks - the main implementers of QDII funds - received a "gauge document" from the China Securities Regulatory Commission (CSRC) stating that QDII funds can in future be invested in mainland as well as overseas markets. That means the funds can be used to trade in yuan-denominated A shares listed in Shanghai and Shenzhen.
The change was seen by some as another move by the regulator to prop up the QDII scheme, which has failed to develop as quickly as initially intended. Others saw it as a reaction to faltering local markets, which after raising concern of overheating early in the year as they continued the strong gains of 2006, have declined by about 20% since November, threatening the holdings of millions of retail investors who have little other outlets to increase their savings.
The QDII scheme, launched in April 2006, is at present the only legitimate channel for mainland Chinese investors to buy overseas equities. Under the program, Chinese banks, fund managers and insurers are allowed to invest in securities, government and corporate bonds and fixed-income instruments on overseas markets within certain quotas.
One purpose behind the scheme, which allows individuals to convert yuan funds freely for capital investment overseas, was that it would help trim expansion of the country's growing foreign exchange reserves, curb excessive liquidity in domestic markets and reduce pressure on the Chinese currency to appreciate. It is was also part of moves to liberalize the yuan on the capital account.
China several years ago liberated the yuan in the current account, which roughly speaking deals with daily flows of money. It only partly opened the capital account, through the QDII and Qualified Foreign Institutional Investor schemes, by which overseas funds can enter the mainland market. Only when the yuan is free on the capital account will it be a fully convertible currency.
"Easing foreign exchange reserve pressures is part of the aim of the introduction and expansion of the QDII scheme, but more important is further liberalizing the yuan on the capital account," Guo Song, director of the capital accounts department at the State Administration of Foreign Exchanges (SAFE), said at a forum in Beijing in November.
By the end of last March, just before the QDII scheme was launched on April 18, China's foreign-exchange reserves, propelled by a huge trade surplus and foreign direct investment, had reached US$875.1 billion, up 32.8% year-on-year. This amount helped to drive up liquidity in domestic markets and intensified pressure on the government to allow a faster appreciation of the yuan against the US dollar.
The QDII scheme was seen as a way of cooling local stock markets by offering a new channel for the country's more than 100 million stock investors, who have little more than 1,000-plus companies listed on the Shanghai and Shenzhen stock exchanges to put their money into. Local and foreign-currency savings had risen to 31.8 trillion yuan (US$4.4 trillion) by the end of March, of which around half was from households, according to the figures provided by the People's Bank of China.
Even so, funds continued to pour into the local stock markets, seen as offering better returns than overseas outlets even before the subprime mortgage crisis in the US had started to be felt around the world. China's CSI 300 Index, a measure of stocks on the Shanghai and Shenzhen exchanges, rose about 160% last year. That compares with a maximum gain of about 60% in the Hong Kong benchmark Hang Seng Index.
Some economists said the strength of the A-share market, with the better returns it offered, was one reason behind the change to allow QDII funds to invest at home even though the scheme was intended to ease excessive domestic liquidity.
"QDII should abide by the following rule: capital flows to where profits and returns are high. That's why the funds can be invested 100% locally or abroad," said Wang Lianzhou, a retired securities law professor who led the QDII Drafting Committee.
The QDII "should be built on sufficient conditions and a solid foundation", he said. "Its investment performance has not been satisfying ... So the move by the CSRC is affirmative in correcting the problem once it was found."
As of December 31, the per-share net asset value of the first batch of QDII products had all fallen below one yuan, translating into a paper loss for subscribers as the funds were sold at one yuan a unit. For example, Huaxia Global Selected Stock Fund reported a per-unit net asset value of 0.893 yuan, Southern Global Selected Stock Fund reported a per-unit net asset value of 0.937 yuan and Harvest Overseas Fund reported 0.897 yuan.
Investment in mainland markets has also been made more attractive by the appreciation of the yuan since the government scrapped the currency's direct link to the US dollar in July 2005. The yuan strengthened about 7% last year and forward contracts indicate it may gain a further 9% against the US currency this year. Even so, the domestic stock market has declined by about 20 per cent since November, as government measures such as increased interest rates to cool the economy have started to bite.
By that light, the gauge document was also "a responsible move for regaining investors' interest", Wang said.
Zhu Geyu, director of marketing at China International Fund Management Company, one of the fund managers approved to invest in overseas stocks, said it was wrong to say permission to invest in the domestic market was granted due to the temporary loss in value of QDII products.
"Every policy launch is considered from the angle of long-term development by a regulatory authority, which would not change a policy solely because of short-term volatility or temporary drop of the products' initial-offer prices," he said.
He said the gauge document confirmed institutional investors' right to choose where to put funds and was in line with the QDII products' concept of global investment.
The QDII scheme was introduced with an initial total quota of $14.2 billion, and 17 banks and funds were awarded quotas to invest overseas. Only $4 billion was remitted as of March 2007, due to restrictions imposed by the authorities on the design of QDII products, the appreciation of the yuan and the greater returns to be gained from investing in the domestic stock market.
Beijing later eased regulations to include brokerage houses and other institutions to invest through QDII, so that the total investment quota had reached $42.17 billion as of the end of September, of which $16.1 billion was granted to banks, $19.5 billion to fund management companies and $6.57 billion to insurers, according to the 21st Century Economic Herald.
Among institutions granted QDII quota are 20 insurers including China Life Insurance Company, Ping An Insurance (Group) Company, PICC Property and Casualty Company and China Reinsurance Company, the China Insurance Regulatory Commission said at the end of November.
The expansion of the QDII to mainland stocks was criticized by Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences (CASS). The scheme, as implied by its name, was for investing in overseas markets, he said
"Allowing QDII to invest in the A-share market will only mean it will miss its goals of reducing excess liquidity and foreign exchange reserves. Meanwhile, there are many A-share funds in China for those who want to buy domestic shares, so it's ridiculous for the institutional investors to buy A shares after trying so hard to get the QDII quotas," he said.
"The possible high returns from the soaring A-share market should not be a reason for the new change as each market has ups and downs."
Issac Meng, a Beijing-based economist at BNP Paribas Securities, echoed Yi's views, saying it was ridiculous for QDII funds to invest in A-shares as this would cause operational and regulatory issues. "The change might pose operational issues such as how the awarded quotas should be divided into overseas or A-share markets, or if the institutions with QDII quotas need to ask for extra quotas for the A-share market," he said.
Industry players expect the amount of QDII funds that will flow into A-shares to be less than the amount going overseas. Zhu, from China International Fund Managemement, said funds could be used for combinations such as "China and India" investments that would include A shares.
Hao Kang, fund manager of the China Opportunity Global Stock Fund at ICBC Credit Suisse, argued that the change extended the institutional investors' "right to choose" in investing in overseas markets, which in turn would enhance their profit opportunities at different stock markets.
"However, given that time for China to fully open its existing capital market to the world is not ripe, even if QDII funds will be allowed to invest in the A-share market, the proportion of funds under my management that will be allocated to the A-share market will be limited to about 10%. The fund will focus on overseas markets," Hao said.
Wang Jingxin, an analyst at Guosen Securities, expected the proportion of QDII funds that will be allocated to the A-share market to be limited in the short term. "I don't think much of the share of funds will be invested in the A share market. Otherwise, the QDII funds will turn out to be A-share funds," he said.
An official at China International Capital Corp (CICC), who asked not to be named, said "priority will be given to H shares, though the QDII quotas will be allowed to invest in A-shares and other overseas markets, as we know the Hong Kong stock market better". H shares refers to mainland-incorporated companies listed in Hong Kong.
CICC, in which Morgan Stanley holds a 34% stake, said on December 17 that it had received a $5 billion quota for its QDII fund and expected to launch a product before or after the Chinese New Year in early February.
Yi, from CASS, said that despite the increasing number of markets in which the QDII funds can be invested, H shares will benefit most as the mainland institutions have a better understanding of the Hong Kong stock market and the mainland companies listed there.
Jun Ma, chief economist at Deutsche Bank, expected that between $50 billion and $70 billion will flow to Hong Kong from the mainland via the QDII program in the next six to 12 months.
Olivia Chung is a senior Asia Times Online reporter.
Tuesday, January 8, 2008
China's consumers let the side down
BEIJING - China's consumer spending, which already makes a lackluster contribution to the world's fastest-growing economy compared with investment and trade, may have hit a two-decade low as a share of gross domestic product (GDP) last year, despite anticipated growth in urban income higher than that of the aggregate economy, according to a Chinese government think-tank.
As housing prices continue to rise, Chinese people's stronger desire to buy their own homes may further curb their consumption of other commodities.
Consumption by Chinese residents contributed only about 36% to GDP in the first three quarters last year, according to the report. That compares with around 60% from 1978 to 2002, when China just started its economic reforms and opening up to the rest of the world. The figure slipped to 50% in 2006.
The latest decline comes as inflation-adjusted disposable income of Chinese urban residents increased by about 13% year-on-year in 2007, a report by the Chinese Academy of Social Sciences (CASS) said.
If that pace continued to the end of the year, it will be the first time for the past five years that growth of urban income surpasses economic growth, according to the report. China's economy was forecast to expand by about 11.5% in 2007. The country's income growth also outpaced economic growth in 1979, 1986, 1990, 2001 and 2002.
The CASS report said the income of Chinese farmers would also be at an 11-year high of 8% growth last year.
The smaller consumption contribution to the country's sizzling economy, compared with an average 70% across the world, had long been seen as a weak link in the country's economic growth. The report said consumer spending was mainly dragged down last year by surging housing prices, with people's stronger desire to buy their own houses curbing consumption of other commodities, according to Li Peilin, director of the Sociology Institute under CASS.
Housing prices jumped 7.3% across 70 cities in January-November compared with a year ago, even as the government took measures such raising interest rates and acting against speculators to limit increases. In some cities such as Beijing and Shenzhen, Li said, prices rose by more than 10% in the first 11 months last year.
In November alone, housing prices in the 70 cities were up 10.5% on average year-on-year, the largest monthly gain since July 2005 when China started to cover more cities in its monthly housing price survey.
Li said another factor was the surging price of food, especially of pork, vegetable, edible oil and grain. In November, the consumer price index rose 6.9%, more than double the government's inflation target of 3% and the biggest increase since 1996. Food prices, accounting for one-third of China's CPI, ballooned 18.2% year-on-year in November, compared with 17.6% in October.
Fixed-asset investment, exports and domestic consumption are considered as the troika pulling forward China’s economy. However, in the past two decades, domestic consumption has remained weak while growth in investment and exports are strong. So much so that there is a saying in China that the cart of the Chinese economy is pulled by two strong horses and one weak donkey.
In January-September, 2007, China’s GDP totaled 16.604 trillion yuan (US$2.3 trillion), up 11.5% year on year. Fixed-asset investment reached 7.825 trillion yuan, up 26.4%. Exports grew 27.1% to US$878.13 billion (6.806 trillion yuan). By comparison, social retail, the indicator for domestic consumption, increased by only 15.9% during the period to 6.383 trillion yuan.
During the period, domestic consumption was equivalent to 38.4% GDP. By comparison, exports and investment was equivalent to 41% and 47% of GDP respectively.
Traditionally, Chinese people are fond of saving money, though the Chinese government now wants to encourage them to spend. By the end of November, private savings in Chinese banks totaled 17.033 trillion yuan, 371.6 billion yuan more than the end of 2006, even as many people withdrew their savings to play stocks.
''China lacks a sound public medical care system and a sound social security system, and as a result, working people have to save money for the rainy day and in case of illness,'' a sociologist researcher with CASS said, who declined to be named. ''Moreover, costs in education have been growing like mad, and parents have to save for their children’s future schooling.
''To encourage people to spend, the government cannot just shouting slogans. It must take real action to put people’s mind at ease about their future,'' he said.
Consumer spending may get a boost from the National People's Congress recent decision to raise the individual income tax threshold from 1,600 yuan a month to 2,000 yuan, effective from March 1. The threshold rise will mean 70% of income earners will be free from paying income tax compared with the present 50%. The amendment will go into effect as of March 1, 2008.
The country's leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and exports. The point was stressed again at the 17th National Congress of the Chinese Communist Party (CCP) in October last year.
But in face of growing costs in housing, medical care and education in recent years, Chinese people are tending to save more. In past couple of years, increasing numbers have also been putting their money into the stock market, instead of spending, analysts say.
The number of new A-share stock accounts opened daily reached about 350,000 in April. As the country's stock markets became more volatile in the second half, the number of new accounts opened per day dropped significantly, but still hit 122,000 in the last week of November.
Enthusiasm of retail investors helped to drive up the benchmark Shanghai Composite Index almost threefold before a retreat towards the end of the year, after it more than doubled in 2006.
(Asia Pulse/Xinhua News Agensy)
As housing prices continue to rise, Chinese people's stronger desire to buy their own homes may further curb their consumption of other commodities.
Consumption by Chinese residents contributed only about 36% to GDP in the first three quarters last year, according to the report. That compares with around 60% from 1978 to 2002, when China just started its economic reforms and opening up to the rest of the world. The figure slipped to 50% in 2006.
The latest decline comes as inflation-adjusted disposable income of Chinese urban residents increased by about 13% year-on-year in 2007, a report by the Chinese Academy of Social Sciences (CASS) said.
If that pace continued to the end of the year, it will be the first time for the past five years that growth of urban income surpasses economic growth, according to the report. China's economy was forecast to expand by about 11.5% in 2007. The country's income growth also outpaced economic growth in 1979, 1986, 1990, 2001 and 2002.
The CASS report said the income of Chinese farmers would also be at an 11-year high of 8% growth last year.
The smaller consumption contribution to the country's sizzling economy, compared with an average 70% across the world, had long been seen as a weak link in the country's economic growth. The report said consumer spending was mainly dragged down last year by surging housing prices, with people's stronger desire to buy their own houses curbing consumption of other commodities, according to Li Peilin, director of the Sociology Institute under CASS.
Housing prices jumped 7.3% across 70 cities in January-November compared with a year ago, even as the government took measures such raising interest rates and acting against speculators to limit increases. In some cities such as Beijing and Shenzhen, Li said, prices rose by more than 10% in the first 11 months last year.
In November alone, housing prices in the 70 cities were up 10.5% on average year-on-year, the largest monthly gain since July 2005 when China started to cover more cities in its monthly housing price survey.
Li said another factor was the surging price of food, especially of pork, vegetable, edible oil and grain. In November, the consumer price index rose 6.9%, more than double the government's inflation target of 3% and the biggest increase since 1996. Food prices, accounting for one-third of China's CPI, ballooned 18.2% year-on-year in November, compared with 17.6% in October.
Fixed-asset investment, exports and domestic consumption are considered as the troika pulling forward China’s economy. However, in the past two decades, domestic consumption has remained weak while growth in investment and exports are strong. So much so that there is a saying in China that the cart of the Chinese economy is pulled by two strong horses and one weak donkey.
In January-September, 2007, China’s GDP totaled 16.604 trillion yuan (US$2.3 trillion), up 11.5% year on year. Fixed-asset investment reached 7.825 trillion yuan, up 26.4%. Exports grew 27.1% to US$878.13 billion (6.806 trillion yuan). By comparison, social retail, the indicator for domestic consumption, increased by only 15.9% during the period to 6.383 trillion yuan.
During the period, domestic consumption was equivalent to 38.4% GDP. By comparison, exports and investment was equivalent to 41% and 47% of GDP respectively.
Traditionally, Chinese people are fond of saving money, though the Chinese government now wants to encourage them to spend. By the end of November, private savings in Chinese banks totaled 17.033 trillion yuan, 371.6 billion yuan more than the end of 2006, even as many people withdrew their savings to play stocks.
''China lacks a sound public medical care system and a sound social security system, and as a result, working people have to save money for the rainy day and in case of illness,'' a sociologist researcher with CASS said, who declined to be named. ''Moreover, costs in education have been growing like mad, and parents have to save for their children’s future schooling.
''To encourage people to spend, the government cannot just shouting slogans. It must take real action to put people’s mind at ease about their future,'' he said.
Consumer spending may get a boost from the National People's Congress recent decision to raise the individual income tax threshold from 1,600 yuan a month to 2,000 yuan, effective from March 1. The threshold rise will mean 70% of income earners will be free from paying income tax compared with the present 50%. The amendment will go into effect as of March 1, 2008.
The country's leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and exports. The point was stressed again at the 17th National Congress of the Chinese Communist Party (CCP) in October last year.
But in face of growing costs in housing, medical care and education in recent years, Chinese people are tending to save more. In past couple of years, increasing numbers have also been putting their money into the stock market, instead of spending, analysts say.
The number of new A-share stock accounts opened daily reached about 350,000 in April. As the country's stock markets became more volatile in the second half, the number of new accounts opened per day dropped significantly, but still hit 122,000 in the last week of November.
Enthusiasm of retail investors helped to drive up the benchmark Shanghai Composite Index almost threefold before a retreat towards the end of the year, after it more than doubled in 2006.
(Asia Pulse/Xinhua News Agensy)
Subprime disease a traded infection
By Thomas Palley
In recent months, the US subprime mortgage crisis has been rippling outward affecting other countries. British banks have made large loan-loss provisions and there has been a run on the Northern Rock bank. German lenders have incurred similar losses and Germany has suffered two large bank failures. European banks have also become leery about lending to each other, forcing the European Central Bank to infuse emergency liquidity. Now, Japan’s banks are feeling the heat.
These global spillovers have their origin in the huge US trade deficits of the past several years. Those deficits played a critical role generating the distorted interest rate environment that created the subprime bubble, and they also explain how subprime loans have wound up in Tokyo portfolios. For policymakers everywhere there are lessons about the dangers of large trade deficits.
Over the last several years, the US trade deficit has persistently drained spending from the US economy. As a result, much of manufacturing failed to recover after the recession of 2001, making for a weaker than usual recovery. This weakness prompted the Federal Reserve to push interest rates to historic lows in 2003, keep them there for an extended period, and then only raise rates gradually for fear of undermining the economy.
The Fed’s ''easy money'' policy succeeded in avoiding a relapse into recession, but it came at the price of a housing bubble and a twisted expansion. The hallmarks of this twisted expansion were house price inflation, a construction boom, explosive growth of non-traditional subprime mortgages, a debt-financed consumer spending binge, and yet larger trade deficits.
The counterpart of these deficits was trade surpluses in the rest of the world, which provided the conduit for distributing subprime holdings globally. Moreover, these trade surpluses persisted because many countries actively pursue export-led growth, and they therefore blocked appreciation of their currencies against the dollar to maintain competitiveness in US markets.
These large surpluses in turn sought an investment home, which helps explain why long-term interest rates did not rise as predicted when the Fed eventually raised short-term interest rates after 2004. More importantly, artificially low short-term interest rates promoted a ''chase for yield'' among investors, who started lending at diminished risk premiums.
This chase affected both American and foreign lenders. In Japan, interest rates have been close to zero for a decade, while European interest rates have been below US rates since the end of 2004. Japanese and European investors therefore willingly bought subprime mortgage loans, which spread holdings around the world and also elicited additional supply.
Ironically, owing to bureaucratic inertia, China is the one country that did not get caught up in the frenzy. Instead, it has invested in Treasuries, while capital controls have limited individual Chinese investor access and exposure to US financial markets.
The vast scale of foreign accumulation of dollar assets means that other countries are now vulnerable to US credit market losses. Paradoxically, that may support the dollar. However, other countries are better placed in terms of economic fundamentals. Though they will bear financial losses, their households are in better financial shape - except in countries that have also had house price bubbles. Contrastingly, US households are burdened with debt, and there is a massive overhang of house supply that promises to drive down house prices, further erode financial wealth, and further undermine economic activity.
The sting in the tail is that a troubled US economy will likely come back to haunt other economies because of their reliance on export-led growth and investments aimed at supplying US consumers. And that sting may hurt China most owing to its heavy reliance on export-led growth and foreign direct investment.
From a policy perspective there are several big lessons. First, failure to address problems in one area (trade deficits) can trigger policy responses elsewhere (monetary policy) that ultimately create even bigger problems. Second, large trade deficits cause real distortions, the consequences of which are costly, albeit slow to emerge.
The consequences of the distortions caused by the US trade deficit will be worst for the US, but they will also affect surplus countries that have accepted dollar-denominated financial assets in payment. Moreover, many countries are vulnerable to the extent that they depend on the US market. That points to the urgency of global policy mechanisms preventing repeats of such trade imbalances, and for countries to shift from export-led growth to domestic demand-led growth.
Thomas Palley is founder of the Economics for Democratic and Open Societies Project.
In recent months, the US subprime mortgage crisis has been rippling outward affecting other countries. British banks have made large loan-loss provisions and there has been a run on the Northern Rock bank. German lenders have incurred similar losses and Germany has suffered two large bank failures. European banks have also become leery about lending to each other, forcing the European Central Bank to infuse emergency liquidity. Now, Japan’s banks are feeling the heat.
These global spillovers have their origin in the huge US trade deficits of the past several years. Those deficits played a critical role generating the distorted interest rate environment that created the subprime bubble, and they also explain how subprime loans have wound up in Tokyo portfolios. For policymakers everywhere there are lessons about the dangers of large trade deficits.
Over the last several years, the US trade deficit has persistently drained spending from the US economy. As a result, much of manufacturing failed to recover after the recession of 2001, making for a weaker than usual recovery. This weakness prompted the Federal Reserve to push interest rates to historic lows in 2003, keep them there for an extended period, and then only raise rates gradually for fear of undermining the economy.
The Fed’s ''easy money'' policy succeeded in avoiding a relapse into recession, but it came at the price of a housing bubble and a twisted expansion. The hallmarks of this twisted expansion were house price inflation, a construction boom, explosive growth of non-traditional subprime mortgages, a debt-financed consumer spending binge, and yet larger trade deficits.
The counterpart of these deficits was trade surpluses in the rest of the world, which provided the conduit for distributing subprime holdings globally. Moreover, these trade surpluses persisted because many countries actively pursue export-led growth, and they therefore blocked appreciation of their currencies against the dollar to maintain competitiveness in US markets.
These large surpluses in turn sought an investment home, which helps explain why long-term interest rates did not rise as predicted when the Fed eventually raised short-term interest rates after 2004. More importantly, artificially low short-term interest rates promoted a ''chase for yield'' among investors, who started lending at diminished risk premiums.
This chase affected both American and foreign lenders. In Japan, interest rates have been close to zero for a decade, while European interest rates have been below US rates since the end of 2004. Japanese and European investors therefore willingly bought subprime mortgage loans, which spread holdings around the world and also elicited additional supply.
Ironically, owing to bureaucratic inertia, China is the one country that did not get caught up in the frenzy. Instead, it has invested in Treasuries, while capital controls have limited individual Chinese investor access and exposure to US financial markets.
The vast scale of foreign accumulation of dollar assets means that other countries are now vulnerable to US credit market losses. Paradoxically, that may support the dollar. However, other countries are better placed in terms of economic fundamentals. Though they will bear financial losses, their households are in better financial shape - except in countries that have also had house price bubbles. Contrastingly, US households are burdened with debt, and there is a massive overhang of house supply that promises to drive down house prices, further erode financial wealth, and further undermine economic activity.
The sting in the tail is that a troubled US economy will likely come back to haunt other economies because of their reliance on export-led growth and investments aimed at supplying US consumers. And that sting may hurt China most owing to its heavy reliance on export-led growth and foreign direct investment.
From a policy perspective there are several big lessons. First, failure to address problems in one area (trade deficits) can trigger policy responses elsewhere (monetary policy) that ultimately create even bigger problems. Second, large trade deficits cause real distortions, the consequences of which are costly, albeit slow to emerge.
The consequences of the distortions caused by the US trade deficit will be worst for the US, but they will also affect surplus countries that have accepted dollar-denominated financial assets in payment. Moreover, many countries are vulnerable to the extent that they depend on the US market. That points to the urgency of global policy mechanisms preventing repeats of such trade imbalances, and for countries to shift from export-led growth to domestic demand-led growth.
Thomas Palley is founder of the Economics for Democratic and Open Societies Project.
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