Yuan’s World

Countries running gigantic trade surpluses must take some responsibility for rebalancing the world economy by raising their own domestic demand for goods and services. That was the message I took from a speech on the balance of payments given last week by John Gieve, deputy governor of the Bank of England. In a talk to the Sovereign Wealth Management Conference in London. Mr Gieve argued that stronger action is needed to correct some of the deep rooted balance of payments imbalances in the world economy and that sovereign wealth funds will have an increasing role to play by boosting investment in their domestic economies to close some of the gap between domestic savings and investment.

Some key points from his speech are given below:

There has been a “remarkable shift of emerging-market economies from debtors to creditors. The current account surpluses of emerging market countries in 2007 was $685 billion (1.3 % ofworld GDP). Most of South America and South East Asia have swung from deficit to surplus in the last ten years

Developed countries as a group (including the USA and the UK) have been running progressively bigger current account deficits although Canada, Japan and Germany continue to operate with current account surpluses

Strong manufacturing growth and rising export values from oil and other commodities have played a key role in widening global trade imbalances. And soo too has “a deliberate policy of fostering export industrial growth” by taking steps to prevent the normal appreciation of currencies of creditor countries (the Chinese Yuan presumably falls squarely into that category?)

Countries with large current account deficits are vulnerable to a rapid reversal of capital flows. And this might prompt deflationary policies to cut domestic spending (C+I+G) or engineer a sharp depreciation of a currency to cause spending to switch away from imports. Ultimately, large current account deficits have a negative impact on economic growth

“There are dangers too for (BoP) surplus countries. Large foreign exchange inflows (e.g. petrodollar mountains) “tend to contribute to asset price bubbles and higher inflation which itself can undermine economic and financial stability in these countries.”

The trade surpluses in Far east and oil exporting countries represent a fundamental imbalance between savings and investment - this needs to close by current account surplus countries looking to increase their own domestic demand for goods and services

The surplus countries need also to allow more flexibility in their exchange rates i.e. allow market exchange rates to adjust to bring about some correction of trade imbalances

The speech is available here from the Bank of England website. Mr Gieve’s speech made use of the IMF data mapper to produce an excellent chart showing the current account deficits and surpluses around the world. You can access the data mapper here.