US Treasury Report on China’s Economic Policies

U.S. Treasury's released its Report to Congress on International Economic and Exchange Rate Policies yesterday, you can download the whole report here, or view the China section only on Wall Street Journal.

Much of the recent decline in China’s trade surplus, however, is likely a result of cyclical or temporary factors. Most importantly, there has been a significantly larger than normal growth differential between China and the rest of the world during the crisis period. Due in part to its timely and large-scale stimulus, China’s economic slowdown was shallower than that of most of the rest of the world, and its economy began to recover much earlier. This resulted in much higher domestic demand growth in China relative to its major trading partners. According to the People’s Bank of China, China’s economic output has been above the economy’s potential since the end of 2009. By March 2010, real industrial production was running 3 percent above potential. In comparison, according to the IMF, advanced economies, which are the end destination for the majority of China’s exports, were running an output gap of 4.5 percent in 2009 and projected to run an output gap of 3.1 percent in 2010, as a result of growth that was far below long-term trends.

Looking forward, China’s trade surplus is likely to rise again as the rest of the world recovers. The differential output gap between China and its major trading partners likely reached its cyclically widest point in the first half of 2010. As China withdraws stimulus, its output likely will return to potential. As advanced countries recover, their output gaps will narrow, as they already have for the last two quarters, and the differential between China’s and advanced economies’ output gaps will narrow.