RESEARCH

The Fraying U.S. – China Co-Dependency

After many years of extraordinary growth, China has clearly been adversely affected by the global economic recession. Its own economy is slowing rapidly, with declines in exports, property prices, and fixed investment. In response, the Chinese government. strongly motivated to maintain stability, is injecting large doses of fiscal stimulus and making other administrative efforts to revive economic activity.

These efforts, combined with the country’s strong balance sheet. should make it likely that China will be among the first to rebound when the global economy finally begins to recover. In the interim, however, China’s exports are likely to decelerate. Growth in its current account surpluses and accumulated foreign exchange reserves are likely to slow markedly.

This deceleration in Chinese capital exports may represent the end of the “global savings glut” at precisely the time of highest US dependency on these global savings that is, as U.S. government dissavings (deficit spending) is forced to rise most substantially. In the meantime, with less foreign capital available to support U.S. economic activity, personal savings in the U.S. will need to rise sharply, probably steepening and/or lengthening the U.S. economic downturn.